Displaying items by tag: Mortgage Banking

Last week I posted a Bloomberg news article supporting my suspicions that investors are putting bad loans back to the banks at an increasing rate. I used JP Morgan as a specific example -Banks
Swallow Another $30 billion or So in More Losses as Their Share Prices
Surge (Again).

A few commenters on syndicated sites appeared to have really underestimated the significance of this development. In the article, it is alleged that Freddie and Fannie are forcing banks to eat up to $30 billion in soured mortgages under the warranties and representations clauses of the sales contract. To highlight the significance of this development, let me remind all that Fannie and Freddie are benchmarks for mortgage lending in the US.

(Bloomberg) -- Taxpayer losses from supporting
Fannie
Mae and Freddie
Mac will top $400 billion, according to
Peter Wallison,
a former general counsel at the Treasury who is
now a fellow at the American Enterprise Institute.

“The situation is they are losing gobs of money, up to
$400 billion in mortgages,” Wallison said in a Bloomberg
Television interview. The Treasury Department recognized last
week that losses will be more than $400 billion when it raised
its limit on federal support for the two government-sponsored
enterprises, he said.

The U.S. seized the two mortgage financiers in 2008 as the
government struggled to prevent a meltdown of the financial
system. The debt of Fannie Mae, Freddie Mac and the Federal Home
Loan Banks grew an average of $184 billion annually from 1998 to
2008, helping fuel a bubble that drove home prices up by 107
percent between 2000 and mid-2006, according to the S&P/Case-
Shiller home-price index.

The Treasury said on Dec. 24 it would provide an unlimited
amount of assistance to the companies as needed for the next
three years to alleviate market concern that the government
lifeline for Fannie Mae and Freddie Mac, the largest source of
money for U.S. home loans, could lapse or be exhausted.

Lax regulation of Fannie Mae and Freddie Mac led to the
mortgage companies taking on too many risky loans, Wallison
said.

“It turns out it was impossible to regulate them,” he
said. “They were too powerful.” He said no one knows how much
will be needed to keep the companies solvent.

Warranties of representation, and forced repurchase of loans

JP Morgan has increased its reserves with regards to repurchase of sold securities but the information surround these actions are very limited as the company does not separately report the repurchase reserves created to meet contingencies. However, the Company's income from mortgage servicing was severely impacted by increase in repurchase reserves. Mortgage production revenue was negative $192 million against negative $70 million in 3Q09 and positive $62 million in 4Q08.

Counterparties who are accruing losses from bad loans, (ex. monoline insurers such as Ambac and MBIA, see A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton circa November 2007,) are stepping up their aggression in pushing loans that appear to breach certain warranties or smack of fraud. I expect this activity to pick up significantly, and those banks that made significant use of brokers and third parties to place mortgages will be at material risk - much more so than the primarily direct writers. I'll give you two guesses at which two banks are suspect. If you need a hint, take a look at who is increasing reserves for repurchases! JP Morgan and their not so profitable acquisition, WaMu!

As I said, losses should be ramping up on the mortgage sector. Notice the trend of housing prices after the onset of government bubble blowing: If Anybody Bothered to Take a Close Look at the Latest Housing Numbers...

PNC Bank and Wells Fargo are in very similar situations regarding acquiring stinky loan portfolios. I suggest subscribers review the latest forensic reports on each company to refresh as the companies report Q4 2009 earnings. Unlike JPM, these banks do not have the investment banking and trading fees of significance (albeit decreasing significance) to fall back on as a cushion to consumer and mortgage credit losses.

March 5 (Bloomberg) -- Fannie Mae andFreddie Mac may force lenders includingBank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. to buy back $21 billion of home loans this year as part of a crackdown on faulty mortgages.

That’s the estimate of Oppenheimer & Co. analyst Chris Kotowski, who says U.S. banks could suffer losses of $7 billion this year when those loans are returned and get marked down to their true value. Fannie Mae and Freddie Mac, both controlled by the U.S. government, stuck the four biggest U.S. banks with losses of about $5 billion on buybacks in 2009, according to company filings made in the past two weeks.

The surge shows lenders are still paying the price for lax standards three years after mortgage markets collapsed under record defaults. Fannie Mae and Freddie Mac are looking for more faulty loans to return after suffering $202 billion of losses since 2007, and banks may have to go along, since the two U.S.- owned firms now buy at least 70 percent of new mortgages.

...

Freddie Mac forced lenders to buy back $4.1 billion of mortgages last year, almost triple the amount in 2008, according to a Feb. 26 filing. As of Dec. 31, Freddie Mac had another $4 billion outstanding loan-purchase demands that lenders hadn’t met, according to the filing. Fannie Mae didn’t disclose the amount of its loan-repurchase demands. Both firms were seized by the government in 2008 to stave off their collapse.

....

The government’s efforts might be counterproductive, since the Treasury and Federal Reserve are trying to help banks heal, FBR’s Miller said. The banks have to buy back the loans at par, and then take an impairment, because borrowers usually have stopped paying and the price of the underlying homehas plunged. JPMorgan said in a presentation last month that it loses about 50 cents on the dollar for every loan it has to buy back.

Striking a Balance

“It’s a fine line you’re walking, because the government’s trying to recapitalize the banks, not put them in bankruptcy, and then here’s Fannie and Freddie putting more pressure on the banks through these buybacks,” FBR’s Miller said. “If it becomes too big of an issue, the banks are going to complain to Congress, and they’re going to stop it.” [Of, course! Let the taxpayer eat the losses borne from our purposefully sloppy underwriting]

Bank of America recorded a $1.9 billion “warranties expense” for past and future buybacks of loans that weren’t properly written, seven times the 2008 amount, the bank said in a Feb. 26 filing. A spokesman for Charlotte, North Carolina- based Bank of America, Scott Silvestri, declined to comment.

JPMorgan, based in New York, recorded $1.6 billion of costs in 2009 from repurchases, including $500 million of losses on repurchased loans and $1 billion to increase reserves for future losses, according to a Feb. 24 filing.

“It’s become a very meaningful issue, and it will continue to be a meaningful issue for the next couple of years,” Charlie Scharf, JPMorgan’s head of retail banking, said at a Feb. 26 investor conference. He declined to say when the repurchase demands might peak.

...

“I can’t forecast the rates at which they’re going to continue,” she said. Her division lost $3.84 billion last year, as the bank overall posted a $6.28 billion profit. “The volume is increasing.”

Wells Fargo, ranked No. 1 among U.S. home lenders last year, bought back $1.3 billion of loans in 2009, triple the year-earlier amount, according to a Feb. 26 filing. The San Francisco-based bank recorded $927 million of costs last year associated with repurchases and estimated future losses.

...

Citigroup increased its repurchase reserve sixfold to $482 million, because of increased “trends in requests by investors for loan-documentation packages to be reviewed,” according to a Feb. 26 filing.

“The request for loan documentation packages is an early indicator of a potential claim,” New York-based Citigroup said.

...

Banks that sell mortgages to Fannie Mae and Freddie Mac have to provide “representations and warranties” assuring that the loans conformed to the agencies’ standards. With more loans going bad, the agencies are demanding that banks turn over loan files, so they can scour the records for missing documentation, inaccurate data and fraud.

...

The most common include inflated appraisals or falsely stated incomes in the loan applications, said Larry Platt, a Washington-based partner at law firm K&L Gates LLP who specializes in mortgage-purchase agreements. The government agencies hire their own reviewers who go back and compare the appraisals with prices from historical home sales, he said.

“They may do a drive-by for a visual inspection,” he said.

Wells Fargo said three-fourths of its repurchase requests came from Freddie Mac and Fannie Mae. While investors may demand repurchase at any time, most demands occur within three years of the loan date, Wells Fargo said.

The mortgage firms are looking at every loan more than 90 days past due and “asking us basically to give them all the documentation to show that it was properly underwritten,” JPMorgan’s Scharf said. “We then go through a process with them that takes a period of time, and literally it’s every loan, loan-by-loan, and have the discussion on whether or not we actually should buy the loan back.”

...

Mortgage repurchases may crimp bank earnings through 2011, Oppenheimer’s Kotowski said. That’s because the worst mortgages -- those underwritten in 2007 -- are just now coming under the heaviest scrutiny, he said.

...

“The worst of the stress is the 2007 vintages, though 2006 and 2005 weren’t a whole lot better and 2008 wasn’t much better,” Kotowski said.

Next week, the Mortgage Bankers Association is holding a workshop in the Dallas area that promises to help banks “survive the buyback deluge” and “build up your repertoire of lender defenses.” According to the MBA’s Web site, the workshop is sold out.

The year 2009 was the year of reflation theories and bubble blowing. Theses of "Green Shoots", catching the bottom, and QE reigning supreme were the order of the day. Sure enough, asset prices (nearly all of them) went one direction, straight up. We all saw it coming, but guys like me who actually count the money and rely on the fundamentals didn't believe it was a sustainable gain. It wasn't a bull market, but a bear market rally. After nearly one year, the reflationists have had their hay day, or have they?

About a year and a half ago I warned that HSBC would be facing increasing and unanticipated (I was a contrarian on the China bubble) losses in Asia, as well as increasing losses on bad debt in the US. I believe I was one of the very few who threw this caution out there. I have included a free opinion along with the macro analysis to badk it up here: Part one of three of my opinion of HSBC and the macro factors affecting it . Subscribers can download the forensic reports: spreadsheet HSBC_Holdings_Report_04August2008 - retail 2008-09-16 06:38:38 87.28 Kb and HSBC_Holdings_Report_04August2008 - pro 2008-11-06 10:11:09 138.89 Kb. As a refresher, the 2nd quarter 2008 review is available here: HSBC 1H 08 results update. There is a discernable trend.

From Bloomberg:

March 1 (Bloomberg) -- HSBC Holdings Plc, Europe’s biggest bank, posted full-year net income that missed analyst estimates after impairments for bad loans rose and profit in Asia fell.

Some of the top secret AIG bailout info is out. Guess who's at the heart of it, making money by creating straight trash, selling it to its clients then buying insurance to benefit from its inevitable crash?
I have been warning about Goldman's ability to sell trash to its clients
for some time now.

This is not a short post, for it is packed with a lot of supporting information, analysis and data. If you are looking for quippy paragraph, soundbyte or quick headline to get an overview of,,, well whatever, click here, or better yet, click here. For everyone else who may be looking for deeper investigative analysis and the unbridled TRUTH for a change, please continue on.

First a little background info. Goldman is supremely overvalued in my opinion. It is even more so considering much of its profit is generated solely from the raping of its clients. I say this holding absolutely no ill will towards Goldman. This is strictly factual. Let's walk through the evidence, of profit potential, valuation, and the stuff behind some of the value drivers in their business model, like brokerage and investment banking...

The lead story this morning of ZH is "The Only Thing Better Than A Zero Hedge? Wells Fargo's "Never Lose" Economic Hedge", explaining more accounting shenanigans (if you read the links below, you will see that I have caught Wells in a few rather aggressive interpretations) related to MSR's. One thing that was noted was the inputs for valuing MSRs using interest rates as was extolled by management. Well...

The biggest input for MSRs are foreclosures, not interest rates. The interest rate argument is academic (assuming a refinance, that may or may not happen when few can qualify) while the foreclosures are happening at a much more rapid and prevalent clip and are much more likely to happen. The foreclosures are also a guaranteed end to MSR income. You can't service a loan on an REO, now can you? So while interest rates are remaining steady and can be put into an MSR valuation formula for a positive GAAP dollar generating result, foreclosures are on the rise and will continue to be, which will (and rightfully so) drive down the values of MSRs. This is probably why (the more academic) interest rates are used for inputs in lieu of a straight pipe to the foreclosure rates.

For those who haven't read my take on Well's Q4, you can read it here: http://boombustblog.com/Reggie-Middleton/1293-The-Wells-Fargo-4th-Quarter-Review-is-Available-and-Its-a-Doozy.html.

This is also a reason why assets need to be market to market, and not to model. Outside of the possibility of the models actually being faulty or just plain old wrong, they are subject to bias and fraud. If one were to simply force he banks to reveal cash flows and yields on the MSRs, as in raw revenues less all expenses divided by acquisition costs, I am sure you will find an inverse relationship with localized foreclosure rates, much tighter than that of interest rates. You will also find that, on a discounted basis, these MSRs are highly overvalued on bank's books. Unfortunately, banks don't do this so the easiest way to get to the values is to let the market set it.

Now, it is time to see if fundamentals return to the market.

From Bloomberg: BBVA Fourth-Quarter Profit Plunges 94% to $44 Million on Asset Writedowns

Jan. 27 (Bloomberg) -- Banco Bilbao Vizcaya Argentaria SA said fourth-quarter profit slumped to 31 million euros from 519 million euros a year earlier as the lender wrote down the value of some assets.

BBVA fell the most in eight months in Madrid trading after
saying net
income fell to 31 million euros ($43.6 million) from
519 million euros a year earlier, the Bilbao, Spain-based bank
said in a filing today. That missed the 1.05 billion-euro median
estimate in a Bloomberg survey of nine analysts as the bank took
a 704 million-euro writedown for its U.S. franchise.

BBVA said it took the
writedowns after analyzing its “most problematic portfolios”
as it prepares for a tough year with recessions in its biggest
markets of Spain and Mexico.

“Whenever there are writedowns like this, there must be a
clear negative message behind that,” said Peter Braendle,
who
oversees about $57 billion at Swisscanto Asset Management in
Zurich and holds BBVA shares. “My concern is that the worst may
not be over, especially in Spain.”

Extra Provisions

The bank took 1.05 billion in charges as it adjusted the
value of its U.S. business. Other writedowns included 200
million euros of provisioning charges for assets acquired in
Spain as it reported additional losses on its Iberian consumer
loan book, BBVA said.

Today’s writedown represents about 15 percent of the
goodwill attached to the U.S. business, according to estimates
by Banco BPI SA. U.S. provisions were 715 million euros higher
than in the third quarter as the bank adjusted the value of
commercial real estate collateral. The bank also took a charge
of 73 million euros on its Mexican cards business and a 90
million-euro charge to account for Venezuelan inflation.

Bad loans as a proportion of total lending climbed to 4.3
percent from 2.3 percent a year ago. “Doubtful risks” on
BBVA’s books leapt to 15.6 billion euros from 12.5 billion euros
in September and 8.6 billion euros a year ago.

Loan Losses

“I don’t think the U.S. goodwill writedown is as important
as all the new non-performing loans,” said Simon Maughan,
an
analyst at MF Global Securities Ltd. in London. “It’s catch-up
time for loan losses. For those people who may have had their
doubts about the Spanish methodology for timely reporting of
NPLs, here is some strong evidence to support their view.” Let it be known that I issued this warning one year ago! [Reggie]

Profit from Spain and Portugal fell 24 percent to 496
million euros from a year ago, the bank said. Bad loans as a
proportion of total lending almost doubled to 5.1 percent from
2.6 percent as lending shrank 1.2 percent.

Earnings from Mexico dropped 29 percent to 268 million
euros, the bank said. BBVA booked a loss of 122 million euros
from its U.S. business compared with a 21 million-euro gain a
year ago.

Net interest income climbed to 3.59 billion euros from 3.09
billion euros a year ago.

The bank had a core capital ratio of 8 percent compared
with 6.2 percent a year ago. BBVA said it would keep its
commitment to distribute 30 percent of 2009 profit in dividend
payments.

This was foreseen nearly one year ago, to date. This bank got caught up in the bear rally and apparently (like many banks) was not deserving of the outrageous boost in the share price. Reference the past analysis.

From Bloomberg: Mortgage-Bond Leverage Reaches 10-to-1, Markets Heal

Jan. 19 (Bloomberg) -- Wall Street firms are loosening terms of their lending to mortgage-bond investors as markets heal, an RBS Securities Inc. executive said.

Repurchase agreement, or repo, lending against the debt has expanded so much since freezing in late 2008 that some banks now offer as much as 10-to-1 leverage and terms as long as one year on certain securities backed by prime jumbo-home loans, said Scott Eichel, the Royal Bank of Scotland unit’s global co-head of asset- and mortgage-backed securities.

Here are some very interesting facts on the latest trend in Alt-a mortgages that have been in the news as of late. The following charts were culled from my mortgage default model which was built primarily from date gathered from the FDIC and the NY Fed.

In reviewing the banks that were originally included in the Doo Doo 32 (a list of likely doomed banks created in the spring of 2008), I decided to have a team take the devil's advocate perspective (an exercise that we normally pursue) and attempt to build a bullish case for the sectors that I viewed bearishly yet have outperformed the S&P and escaped profitable shorting during the last three quarters. The results are illuminating.

Below is a list of shortlisted banks that have reported higher returns relative to S&P 500 between the period March 9, 2009 and January 5, 2010 - the bear market rally of 2009. The methodology that we followed for this short listing is as follows:

· We took out a list of banks that are domiciled in the US and have market capital of more than $500 million and current share price of more than $10.

· Next we calculated returns for each bank and S&P 500 between period March 9, 2009 and January 5, 2010.