Reggie Middleton is an entrepreneurial investor who guides a small team of independent analysts, engineers & developers to usher in the era of peer-to-peer capital markets.
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If readers remember back in 2009 I warned of the excessive risk of mortgage buybacks in the banking industry. Many analysts dismissed this risk then and still do (at least as recentely as the 1st quarter).Yes, I know my wording can be a tad,,, "bombastic", but that does not detract from the validity of said words. Let's parse recent history, shall we?
The Putback Parade Cometh: Pimco, New York Fed Said to Seek Bank of America Repurchase of Mortgages
You've Been Had! You've Been Took! Hoodwinked! Bamboozled! Led Astray! Run Amok! This Is What They Do!
As far back as 2009 (yes, over a year ago) I have been warning readers and subscribers of the (not so) hidden risks of putbacks, warranty and rep reserves, and the overly optimistic under reserving of the big commercial banks. I used JP Morgan as an example (see link list below), but made it clear this warning stood for several big banks(several of the big banks – As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves, As a matter of fact I said that the banks ‘May Become The “New” Tobacco Companies‘ due to legal risk. This risk was significantly exacerbated the day after making that post, Less Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking Industry, The Massachusetts Supreme Court Drops THE BOMB! wherein the Massachusetts Land Court Decision that invalidates foreclosures based on post sale assignments was up held by the Massachusetts Supreme Court. This is permanent, and precedent setting, absolutely justifying and vindicating my post from the day before and clearly demonstrates that The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!
The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!
Step one: Hide the Truth!
JP Morgan Purposely Downplayed Litigation Risk That Spiked 5,000% Last Year & Is Still Severely Under Reserved By Over $4 Billion!!! Shareholder Lawyers Should Be Scrambling Now
See As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves or “After a Careful Review of JP Morgan’s Earnings Release, I Must Ask – “What the Hell Are Those Boys Over at JP Morgan Thinking????” As excerpted from the The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!
This is the part that everybody seems to be overlooking…
All you really need to do is find the banks that accepted a lot of broker business, factor in the expense of the class action suit litigation that is popping up in nearly every state (try Googling it, you will be amazed as big firms and store front lawyers alike are throwing their hats in the ring), and you will see the easiest way out of a potentially tough bind for investors is the put back. Where does this land? Squarely on the balance sheet of the banks – who, BTW have the money to attract even more predatory lawyers. A forensic review of high LTV loans between 2003 and 2007 should find that at the very least 30% were aggressively valued, with a more realistic number coming in at about 60%. Ask anyone who was in in the business at that time, I doubt they will disagree.
When I warned of this LAST YEAR, it was not taken very seriously. I suggest all should think again – Reggie Middleton on JP Morgan’s “Blowout” Q4-09 Results. Let’s reminisce…
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Re: B of A - With Banks Being Forced To Admit The Inevitable Truth, How Long Will It Be Before Fundamentals Rule The Day Again?
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As JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obvious Years Ago That This Industry May Become The "New" Tobacco Companies
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I Warned That Banks Will Soon Be Forced To Walk Away From Homes... Guess What!
- and much more:Dexia Sets A $5.1bn Provision For Loss On Trying To Sell The Same Residential Real Estate Assets Upon Which JP Morgan Has Slashed Provisions 83% to $1.2bn from $7.0bn or There's Something Fishy at the House of Morgan
By now I can assume you either catch my drift or never will. If you do catch said drift, realize that the WSJ reports:
BofA Nears Huge Settlement
Bank of America Corp. is close to an agreement to pay $8.5 billion to settle claims by a group of high-profile investors who lost money on mortgage-backed securities purchased before the U.S. housing collapse, said people familiar with the matter. The payment would be the largest such settlement by a financial-services firm to date, exceeding the total profits of the Charlotte, N.C., bank since the onset of the financial crisis in 2008. Bank of America's board approved the settlement during a meeting Tuesday to discuss the matter, one of these people said.
... A settlement would end a nine-month fight with a group of 22 investors who hold mortgage-backed securities originally valued at $105 billion, including the giant money manager BlackRock Inc., the insurer MetLife Inc. and the Federal Reserve Bank of New York.
A deal could embolden mutual-fund managers, insurance companies and investment partnerships to seek similar settlements with other major U.S. banks by arguing that billions of dollars in loans they bought before the housing collapse didn't meet sellers' promises or were improperly managed. Bank of America, Wells Fargo & Co and J.P. Morgan Chase & Co. collect loan payments on about half of all outstanding U.S. mortgages.
The dispute between Bank of America and the mortgage investors began last fall when they alleged in a letter to the bank that securities they scooped up before the financial crisis from Countrywide Financial Corp. were full of loans that didn't meet sellers' promises about the quality of the borrowers or the collateral. The investors also alleged Countrywide failed to maintain accurate files while managing the loans. Bank of America purchased Countrywide in 2008 for $4 billion.
... Bank of America would take a corresponding pre-tax charge against earnings for the second quarter, these people said. The after-tax cost to the bank would be roughly $5 billion, they said. The charge would increase the chances that Bank of America will report a loss in the second quarter.
...On Wednesday, the bank is expected to announce it is taking a separate provision of billions of dollars during the quarter to cover future repurchase claims and other mortgage-related issues, these people said. The trustee expects to submit a filing soon asking a New York state court to approve the transaction.
...Earlier this year, the bank said its maximum possible loss from private mortgage put-back demands was $7 billion to $10 billion—above and beyond the $6.2 billion already reserved for probable mortgage-repurchase losses.
A multibillion-dollar charge would "wipe out most earnings in the first half of the year," said banking analyst Mike Mayo earlier this month, before news of the potential settlement. Bank of America earned $2 billion in the first quarter. Mr. Mayo had lowered his 2011 earnings-per-share estimate to 50 cents, from $1, based on an expectation that a settlement could amount to $7 billion.
I urge all readers to look back through your sell side analysts notes and ascertain whether these putback risks were adequatliy delineated back in 2009, like they should have been. As the WSJ article stated, "A deal could embolden mutual-fund managers, insurance companies and investment partnerships to seek similar settlements with other major U.S. banks by arguing that billions of dollars in loans they bought before the housing collapse didn't meet sellers' promises or were improperly managed. Bank of America, Wells Fargo & Co and J.P. Morgan Chase & Co. collect loan payments on about half of all outstanding U.S. mortgages.". Oh, this is guaranteed. The insolvent monoline industry (the very same industry whose leaders - Ambac and MBIA - we declared insolvent in 2007) has been at the forefront of the putback brigade, and for good reason.
For the record, from Amercian Banker:The deal could set the stage for settlements by the other big banks sued for mortgage securities losses — JPMorgan Chase, Citigroup and Wells Fargo. Paul Miller of FBR Capital Markets estimated B of A's total losses from soured mortgages could reach $25 billion. Miller predicted Chase's losses could reach $11.2 billion, Wells Fargo could lose up to $5.2 billion, and Citigroup could see losses of at least $3.3 billion. Before reports of B of A's settlement came out on Tuesday, FDIC Chairman Sheila Bair said, "Unresolved legal claims [related to these mortgages] could serve as a drag on the recovery of the housing market." The Journal added the $8.5 billion is more than "the total profits of the Charlotte, N.C., bank since the onset of the financial crisis in 2008." Wall Street Journal, New York Times, Washington Post
Relevant BoomBustBlog Research
For public consumption: An Independent Look into JP Morgan
Subscriber ony:
pdf Federal Reserve MBS Purchasing Analysis (1.96 MB 2010-12-15 13:10:09)
spreadsheet BAC Q1 2010 Earnings Review (272.63 kB 2010-04-21 11:32:13)
pdf Bank Charge-offs and Recoveries 2Q10 (272 kB 2010-10-01 12:06:03)
