Forced repurchases of soured U.S. mortgages may be the “biggest issue facing banks” even as errors in the foreclosure process draw attention to other industry risks, according to JPMorgan Chase & Co. analysts.
Future losses from repurchases of home loans whose quality failed to meet sellers’ promises will likely total $55 billion to $120 billion, or potentially $10 billion to $25 billion for the next five years, the New York-based mortgage-bond analysts led by John Sim and Ed Reardon wrote in a Oct. 15 report.
While a “firestorm of news” sparked by some loan servicers’ decisions to halt action on defaulted loans is drawing renewed attention to banks’ mortgage-repurchase risks, the foreclosure issues themselves are mostly “process-oriented problems that can be fixed,” the analysts wrote.
“Putback risk may be the biggest issue facing banks,” the analysts wrote, referring to items such as faulty appraisals that can be used to force lenders to repurchase mortgages under sales contracts. The analysts declined to comment beyond the report.
Speculation over mortgage issues helped drive down bank stocks last week after attorneys general from all 50 states said they had jointly opened an investigation into whether lenders and mortgage companies falsified documents in foreclosure proceedings. Home-loan servicers including Ally Financial Inc., Bank of America Corp. and JPMorgan, which manage outstanding mortgages, had earlier suspended some foreclosures or evictions while they review paperwork.
JPMorgan analysts said mortgage repurchase costs stem from $2 trillion of loans that have defaulted or are likely to go bad, among the $6 trillion of U.S. mortgages and home-equity debt originated from 2005 through 2007. The defaults will create about $1.1 trillion of losses for banks, government-supported Fannie Mae and Freddie Mac, bond investors and insurers.
Losses from forced repurchases may total $23 billion to $35 billion for loans sold to or insured by government-backed companies; $40 billion to $80 billion for so-called non-agency mortgages that aren’t backed by Fannie Mae, Freddie Mac or other government agencies, and $20 billion to $31 billion for home- equity loans, they said. Banks have already realized or reserved for a portion of the losses, the analysts wrote.
Investors in non-agency debt may only recoup 5 percent of losses in part because of difficulties convincing bond trustees to ask banks to repurchase bad loans and the necessity of proving misstatements under the securities contracts are material, they said. For agency mortgages, the figure will be 10 percent, they said.
Mayo, Ramsden Estimates
Compass Point Research and Trading LLC’s Chris Gamaitoni estimated in August that lenders may suffer as much as $179.2 billion in losses tied to soured mortgages they will be forced to repurchase from mortgage-bond insurers and investors. Earlier this year he predicted $28 billion for agency loans.
Last week, Mike Mayo, an analyst at Credit Agricole Securities USA in New York, estimated a cost of $20 billion for repurchases when including government-supported Fannie Mae and Freddie Mac. Goldman Sachs Group Inc.’s Richard Ramsden said a worst-case scenario would be $84 billion, while Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, said it could cost the banks as much as $91 billion.
With foreclosure documents, some items are easy to resolve or don’t need fixing, the JPMorgan analysts wrote.
Mortgage bonds qualify as so-called real-estate mortgage investment trusts for tax purposes even when the debt is transferred to the securities with its endorsements left blank, they said.
Servicers are able to work around legal challenges related to the Mortgage Electronic Registration System by taking loans out of the system and putting it into their name or that of the debt’s owner before pursuing a foreclosure, they said.
Foreclosure delays created by the issues will damage senior-ranked non-agency mortgage securities, costing as much as 4 cents on the dollar for certain bonds if postponements take six months, according to the analysts.
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