January 31, 2012
By Christopher Booker
When I happened to wake up in the middle of the night last Wednesday and caught the BBC World Service’s live relay of President Obama’s State of the Union address to Congress, two passages had me rubbing my eyes in disbelief.
The first came when, to applause, the President spoke about the banking crash which coincided with his barnstorming 2008 election campaign. “The house of cards collapsed,” he recalled. “We learned that mortgages had been sold to people who couldn’t afford or understand them.” He excoriated the banks which had “made huge bets and bonuses with other people’s money”, while “regulators looked the other way and didn’t have the authority to stop the bad behaviour”. This, said Obama, “was wrong. It was irresponsible. And it plunged our economy into a crisis that put millions out of work.”
I recalled a piece I wrote in this column on January 29, 2009, just after Obama took office. It was headlined: “This is the sub-prime house that Barack Obama built”. As a rising young Chicago politician in 1995, no one campaigned more actively than Mr Obama for an amendment to the US Community Reinvestment Act, legally requiring banks to lend huge sums to millions of poor, mainly black Americans, guaranteed by the two giant mortgage associations, Fannie Mae and Freddie Mac.
January 31, 2012
By Chris Arnold
“Freddie Mac is hoping you end up homeless.” –KTRN
Freddie Mac, a taxpayer-owned mortgage company, is supposed to make home-ownership easier. One thing that makes owning a home more affordable is getting a cheaper mortgage.
But Freddie Mac has invested billions of dollars betting that U.S. homeowners won’t be able to refinance their mortgages at today’s lower rates, according to an investigation by NPR and ProPublica, an independent, nonprofit newsroom.
These investments, while legal, raise concerns about a conflict of interest within Freddie Mac.
“We were actually shocked they did this,” says Scott Simon, who heads the mortgage-backed securities team at the giant bond trading and investment firm called PIMCO. “It seemed so out of line with their mission, out of line with what Congress wanted them to do.”
Freddie Mac, formally called the Federal Home Loan Mortgage Corp., was chartered by Congress in 1970. On its website, it says it has “a public mission to stabilize the nation’s residential mortgage markets and expand opportunities for homeownership.” The company is owned by U.S. taxpayers and overseen by a regulator, the Federal Housing Finance Agency (FHFA).
In December, Freddie’s chief executive, Charles Haldeman, assured Congress his company is “helping financially strapped families reduce their mortgage costs through refinancing their mortgages.”
But public documents show that in 2010 and 2011, Freddie Mac set out to make gains for its own investment portfolio by using complex mortgage securities that brought in more money for Freddie Mac when homeowners in higher interest-rate loans were unable to qualify for a refinancing.
Those trades “put them squarely against the homeowner,” PIMCO’s Simon says.
Freddie Mac’s trades came at a time when mortgage rates were falling to record lows. Millions of homeowners wish they could refinance, but their lenders tell them they can’t qualify for today’s low rates because of tight rules. Freddie Mac is one of the gatekeepers with the power to set those rules, and lately, it has been saying no more often to homeowners.
January 10, 2012
The Weekly Standard
By DANIEL HALPER
President Obama’s first chief of staff Rahm Emanuel once sat on the board of troubled federal mortgage giant Freddie Mac. Bill Daley, the president’s chief of staff whose departure was announced today, was previously a top executive at financial firm J.P. Morgan Chase & Co. So of course there should be little surprise that Obama’s latest chief of staff, announced today by the president himself, also has deep ties to the financial industry himself.
From 2006-2008, Jack Lew was chief operating officer of Citibank’s alternative investments division. And it was his division that made billions of dollars betting “U.S. homeowners would not be able to make their mortgage payments,” as the Huffington Post reported.
November 18, 2011
The American Dream
The United States is drowning in a sea of red ink from coast to coast and most Americans have absolutely no idea what is about to happen. Hopefully you have started to prepare for the coming U.S. financial crisis. If not, hopefully this article will be a wake up call for you. Right now, governments all over Europe are on the verge of financial implosion. Most Americans aren’t paying much attention to that, but they should be, because what is happening to Greece and Italy right now will eventually be happening here. Just recently, the U.S. national debt passed the 15 trillion dollar mark. State and local government debt is also at record levels. Tens of millions of American families are in debt up to their eyeballs, and millions more Americans fell into poverty last year. Meanwhile, the “too big to fail” banks just keep getting larger and the Federal Reserve continues to inflate the debt bubble. At some point this debt bubble is going to burst, and when it does it is going to unleash financial hell all over America.
Below you will find a list of numbers – 1 through 30. For each number, a statistic has been chosen that demonstrates the financial nightmare that the United States is facing. It is simply not possible to rack up debt at staggering rates forever. At some point the debt spiral is going to stop.
A lot of politicians are claiming that they can stop the coming financial crisis from happening. But the truth is that unless our entire financial system is fundamentally transformed, nothing is going to be able to stop the financial nightmare that is headed our way.
Unfortunately, the vast majority of our politicians still believe that the current financial system can be fixed and the vast majority of them still fully support the Federal Reserve.
That is going to prove to be a gigantic mistake. The following are 30 facts that show that the United States is heading directly for a massive financial crisis….
1 – For fiscal year 2011, the U.S. federal government had a budget deficit of nearly 1.3 trillion dollars. That was the third year in a row that our budget deficit has topped one trillion dollars.
2 – The balance sheet of the Federal Reserve has been ballooning like crazy. At this point, the Federal Reserve has very little capital backing a balance sheet that is well over 2 trillion dollars.
The following is how Michael Pento of Euro Pacific Capital describes the situation that the Fed is in….
Today, the Fed has $52.5 billion of capital backing a $2.7 trillion balance sheet.
Prior to the bursting of the credit bubble, the public was shocked to learn that our biggest investment banks were levered 30-to-1. When asset values fell, those banks were quickly wiped out. But now the Fed is holding many of the same types of assets and is levered 51-to-1! If the value of their portfolio were to fall by just 2%, the Fed itself would be wiped out.
3 – It is being estimated that it would take a total of 3 trillion euros to bail out all of the countries in Europe that are in imminent danger of financial implosion. Europe is heading for a gigantic financial crisis, and when it happens the United States is going to be dragged down as well.
4 – As the U.S. economy continues to decline, millions of American families are having a very hard time feeding themselves. Today, one out of every seven Americans is on food stamps and one out of every four American children is on food stamps.
5 – The U.S. Postal Service has lost more than 5 billion dollars over the past year. It looks like the federal government is going to have to help the U.S. Postal Service out financially.
6 – Freddie Mac says that it is going to need another $6 billion bailout from the federal government.
7 – Fannie Mae says that it is going to need another $7.8 billion bailout from the federal government.
8 – We are told that the economy is recovering, but the number of Americans on food stamps has grown by another 8 percent over the past year.
9 – The U.S. unemployment rate has been hovering around 9 percent for 30 straight months. It is currently sitting at 9.0 percent.
10 – The total cost of just three federal government programs – the Department of Defense, Social Security and Medicare – exceeded the total amount of taxes brought in during fiscal 2010 by 10 billion dollars.
11 – Back in the year 2000, 11.3% of all Americans were living in poverty. Today, 15.1% of all Americans are living in poverty.
12 – The “free trade” agenda being pushed by our globalist politicians is absolutely killing us. Even in industries that we were once dominant in we are now getting wiped out. For instance, in 2010 South Korea exported 12 times as many automobiles, trucks and parts to us as we exported to them. Hundreds of billions of dollars that should be going to support American jobs and businesses is going overseas instead.
13 – Since 1985, the federal government has added 13 trillion dollars to the national debt.
14 – The U.S. Treasury Department says that instead of $14.3 billion, the total losses from the auto industry bailouts will actually be $23.6 billion.
15 – Amazingly, the U.S. federal government is now 15 trillion dollars in debt. When Obama first took office the debt was just 10.6 trillion dollars.
October 25, 2011
By Jody Shenn
Government efforts to make lenders pay for soured mortgages may be keeping potential borrowers from record-low interest rates, slowing home sales and refinancing as banks tighten standards to avoid more demands for refunds.
Lenders are insisting on higher credit scores and more documents than required by the Federal Housing Administration and government-backed Fannie Mae and Freddie Mac. Quicken Loans Inc. and Vision Mortgage Capital are among firms saying they are increasing scrutiny of would-be borrowers in response to pressure to cover losses incurred on U.S.-backed housing debt.
“You’ve got to take measures now to protect yourself,” John B. Johnson, chief executive officer of Birmingham, Alabama- based MortgageAmerica Inc., said during a panel discussion this month. Demands that lenders repurchase bad mortgages from Fannie Mae and Freddie Mac are “casting a pall over the market. I fear that it will face a much longer recovery because of this.”
Mortgage rates as low as 3.94 percent are proving insufficient to revive housing. Sales of existing homes fell 3 percent last month, National Association of Realtors data show, and 18 percent of the group’s members reported contract cancellations, at least twice as high as in normal circumstances. Among the reasons were refusals of loan applications after appraisals came in below sales prices.
Faulty mortgage lending and foreclosure practices have cost the five biggest U.S. home lenders more than $68 billion since 2007, according to data compiled by Bloomberg News. Much of the amount has stemmed from losses tied to Fannie Mae, Freddie Mac and the FHA, which together buy or insure more than 90 percent of new mortgages.
Fannie Mae and Freddie Mac have drawn $170 billion of U.S. aid since being seized 2008. The companies are under orders from their regulator to recover as much as they can for taxpayers.
Lenders’ contracts with Fannie Mae and Freddie Mac allow them to force buybacks of mortgages if the loan originators fail to properly vet debt, such as by accepting inflated borrower incomes or appraisals. Flawed paperwork can lead to pressure from Fannie Mae and Freddie Mac even on performing mortgages.
“Documentation standards are getting more and more onerous because no one wants to manufacture an imperfect loan, even if the imperfection is really insignificant,” said Quicken Loans CEO Bill Emerson, who leads the eighth-largest U.S. home lender and No. 1 online mortgage originator.
The response by his Detroit-based company includes having each of its loans reviewed by a second underwriter to ensure the quality isn’t later questioned, Emerson said in an Oct. 11 interview during the Mortgage Bankers Association’s annual conference in Chicago.
MortgageAmerica has had to deal with repurchase demands for seemingly minor issues or ones outside a lenders’ expertise, according to Johnson. In one case, the septic tank for a home was located slightly beyond the mortgaged property. The natural response, he said, is to limit lending.
The Justice Department sued Deutsche Bank AG (DBK) in May for more than $1 billion for alleged failures by the company’s shuttered lending unit to meet FHA standards. The U.S. sued under the False Claims Act, which allows damages three times the size of loss. Deutsche Bank has said the case targets conduct that occurred before it bought the unit and a spokeswoman for the company called the allegations “unreasonable and unfair.”
Lenders are probably “overcompensating” for the risk they face from soured mortgages, said Robert C. Ryan, a senior adviser to the head of U.S. Department of Housing and Urban Development, which oversees the FHA. “We’re not in the business of trying to scare lenders.”
‘The Right Balance’
The government must “strike the right balance between providing financing and access to borrowers and, at the same time, making sure the loans originated are fair and sustainable for the borrowers,” Ryan said in an interview.
Freddie Mac is doing what it should to protect itself and taxpayers, and is being reasonable in its demands, said Brad German, a spokesman for the McLean, Virginia-based firm.
“We don’t want to pay for mortgages that should never have been sold to us,” German said in an interview. “When minor defects in a loan file are found, it does not necessarily trigger a repurchase; it triggers a request to the lender to remedy the defect, either by finding a missing document or taking similar corrective actions.” Andrew Wilson, a spokesman for Washington-based Fannie Mae, declined to comment.
“Mortgage originators are more closely adhering to underwriting guidelines resulting in fewer of the mortgage defects of prior years,” said Corinne Russell, spokeswoman for the Federal Housing Finance Agency, which regulates so-called government sponsored enterprises Fannie Mae and Freddie Mac. “This lowers default risk to the GSEs.”
President Barack Obama’s latest push to help more borrowers refinance into cheaper rates may hinge on the effectiveness of changes to Fannie Mae and Freddie Mac repurchase rights. FHFA acting Director Edward DeMarco told reporters yesterday that the companies would offer “substantial” relief from buyback demands without providing “blanket or absolute” protection as they expand the federal Home Affordable Refinance Program for borrowers with little or no equity in their houses.
While the average rate on a 30-year fixed loan was 4.11 percent in the week ended Oct. 20, the historically low costs don’t capture the “very, very harsh underwriting standards” that potential home buyers face, said Ron Peltier, CEO of HomeServices of America, the property brokerage owned by billionaire Warren Buffett’s Berkshire Hathaway Inc. The process is “the most embarrassing, difficult thing you can imagine,” Peltier said in an Oct. 13 interview at Bloomberg headquarters in New York.
‘Gone too Far’
The average time between mortgage application and closing rose to about 52 days last year, three weeks longer than in 2008, according to J.D. Power and Associates surveys.
Pressure from the GSEs has “definitely stanched the flow of credit to the mortgage market, but we had clearly gone too far,” said Richard Eckert, an analyst in San Francisco at securities firm B. Riley & Co. who wrote research on subprime lenders during the housing boom and then joined a hedge fund betting against property loans during the collapse. “We’ve got to return to some kind of happy balance.”
Bank of America Corp. (BAC) has scaled back mortgage lending as CEO Brian T. Moynihan prepares for new capital requirements and grapples with demands that it compensate investors including Fannie Mae and Freddie for losses.
“Our repurchase experience with the GSEs continues to evolve and their repurchase requests and resolution processes has become increasingly inconsistent with our interpretation of our contractual obligations,” the Charlotte, North Carolina- based bank said in a slide presentation last week.
Terry Francisco, a spokesman for Bank of America, had no immediate comment. Wells Fargo & Co. (WFC), the largest U.S home lender, had no comment, according to Vickee Adams, a spokeswoman.
The prospect of reimbursement demands has hurt home sales, said Brian Chappelle, a partner at consulting firm Potomac Partners LLC, during a panel at the mortgage conference. While the FHA allows down payments as low as 3.5 percent from borrowers whose credit scores are at least 580, lenders are setting the bar higher, such as at 620, he said.
Lenders “feel like they’re being held accountable for things beyond their control,” he said. “The only thing the industry can do is tighten up on the front end.”
Vision Mortgage Capital President Regina Lowrie has her staff conduct extra quality-control reviews on all of its loans before closings, up from 10 percent before housing slumped. “That adds cost to the process,” hurting consumers who ultimately must pay for the work, she said at the conference.
The unit of Plymouth Meeting, Pennsylvania-based Continental Bank also started taking additional looks at consumers’ credit files shortly before completing loans, based on Fannie Mae and Freddie Mac guidance, Lowrie said. It finds more situations like the potential borrower who took out a new car lease while waiting for the application to clear, “and now that loan’s going back to underwriting again,” she said.
October 13, 2011
By: Derek Kravitz
The average interest rate on 30-year fixed mortgages rose sharply this week after falling below 4% for the first time in history.
Freddie Mac said Thursday that the average interest rate on 30-year fixed loans rose to 4.12%. That’s up from 3.94% last week, lowest rate ever according to the National Bureau of Economic Research.
The average rate on 15-year fixed mortgages, a popular refinancing option, increased to 3.37% from 3.26%, which also was a record.
Super low rates haven’t been enough to lift the housing market, which has struggled with anemic sales and declining home prices.
Rates have been below 5% for all but two weeks the past year. Just five years ago they were closer to 6.5%.
Yet sales of previously occupied homes this year are on track to be among the worst in 14 years. And sales of new homes are on pace to finish the year as the lowest on records dating back a half-century.
For many Americans, buying a house is too big a risk in this economy. Unemployment has been stuck near 9% for more than two years, raises are scarce and millions of foreclosures are forcing down home prices.
Others can’t qualify for the historically low rates. Banks are insisting on higher credit scores and 20% down payments for first-time buyers. Many repeat buyers have too little equity in their homes to qualify for loans.
Just half of Americans say they’ll ever be able to save enough money for a down payment, according to a survey by the National Foundation for Credit Counseling.
Mortgage rates tend to track the yield on 10-year Treasury notes. The yield is up this week after falling steadily in previous weeks.
Low mortgage rates have fueled a modest boom in refinancing. Still, most people who can afford to refinance have already locked in rates below 5%.
Economists say rates need to fall at least a full percentage point before it makes sense to refinance again. The reason is homeowners typically pay a few thousand dollars in closing costs when they refinance.
The low rates being offered also don’t include extra fees, known as points, which many borrowers must pay to get the lowest rates. One point equals 1% of the loan amount.
And more Americans refinancing their mortgages are not likely to provide much benefit to the economy. At least 25% of U.S. homeowners have little or no equity in their homes. So unlike in the past, people who refinance now don’t tend to keep cash out for home-improvement projects or other big expenditures that would contribute to economic growth.
To calculate average mortgage rates, Freddie Mac surveys lenders across the country Monday through Wednesday each week.
February 23rd, 2011
By: Les Christie
Home prices took a big hit at the end of 2010, even as the rest of the economy gained steam.
National home prices fell 4.1% during the last three months of 2010, compared with 12 months earlier, according to the latest report from the S&P/Case-Shiller home price index, a closely watched indicator of market trends. They were down 1.9% compared with three months earlier.
“Despite improvements in the overall economy, housing continues to drift lower and weaker,” said David Blitzer, spokesman for S&P.
And things may get a lot worse, said Robert Shiller, a Yale economist and half of the Case-Shiller team, in a web conference after the report’s release.
“There’s a substantial risk of home prices falling another 15%, 20% or 25% more,” he said.
Shiller cited a few reasons for his bearish stance. The government is expected to reduce the presence of Fannie Mae and Freddie Mac in the housing market. These agencies currently provide loan guarantees for about two-thirds of mortgages. If they fade away, private mortgage money will have to fill the gap and the cost of mortgage borrowing will surely rise. That will hurt home prices.
Can the Saudis really ride to the rescue?
There’s also talk of possibly ending the mortgage interest tax deduction for many homeowners. Meanwhile, the weak economic recovery may be threatened by higher oil prices as a result of turmoil in the Mideast.
At the web conference, Shiller’s index partner Karl Case wasn’t much more optimistic.
“I see [the market] bouncing along the bottom with a slight negative trend,” said Case, an economics professor emeritus at Wellesley College.
A widespread drop
On a seasonally adjusted basis, the national index surpassed the low it hit in the first quarter of 2009.
The decline was widespread, with 18 of the 20 large cities covered by a separate S&P/Case-Shiller index recording losses for the year. The only gains were posted by Washington, which was up 4.1%, and San Diego, which saw prices climb 1.7%.
The biggest loser for the year was Detroit, where prices dropped 9.1%.
Most (and least) affordable cities to buy a house
“We’re really close to being at the bottom again,” said S&P’s Maureen Maitland. “Last year’s gains came courtesy of the tax incentives and the market is not holding up on its own.”
The impact of homebuyer tax credits ended back last spring, and the two quarters of data since then reflect that. Prices fell steeply during the third quarter, down 3.3%. When the credit was in effect, prices rose consistently, up four out of five quarters starting in the second quarter of 2009.
S&P reported that both the company’s 10- and 20-city indexes also fell month over month. In three cities, Detroit, Cleveland and Las Vegas, home prices have dropped below their January 2000 levels — yes, you’d have to go back to the past millennium to find lower prices there.
Eleven markets, including New York and Chicago, have reached their lowest levels since home prices peaked in 2006 and 2007.
November 3rd, 2010
By: Lorraine Woellert
Freddie Mac, the mortgage-finance company operating under federal conservatorship, requested $100 million in U.S. Treasury Department aid after reporting a narrower loss for the third quarter.
The company reported a loss of $4.1 billion for the three months ended Sept. 30, including $1.6 billion owed to Treasury as a dividend payment on the federal government’s 80 percent stake, McLean, Virginia-based Freddie Mac said today in a U.S. Securities and Exchange Commission filing. Freddie Mac requested $1.8 billion when it reported a $6 billion second-quarter loss.
The request for aid accompanying Freddie Mac’s fifth straight quarterly loss adds to the $63 billion the government- sponsored firm has received since September 2008, when it was seized by regulators along with Washington-based Fannie Mae. Including today’s request, the two firms have received more than $148 billion in aid and returned $14.6 billion in dividends.
“Although Freddie faces a number of challenges, the biggest single drain on the bottom line will be the dividends,” Jim Vogel, head of agency debt research at FTN Financial in Memphis, Tennessee, said in an e-mail.
Freddie Mac and Fannie Mae were chartered by the federal government to boost homeownership by buying mortgages from lenders and providing a U.S. guarantee of principal. Freddie Mac said it owned or guaranteed about 23 percent of single-family mortgages as of Sept. 30.
Non-performing single-family loans on the company’s books rose to $112.7 billion in the third quarter from $85.9 billion a year earlier. Loans at least 90 days past due “remained high due to the continued weakness in home prices and persistently high unemployment, extended foreclosure timelines in many states, and challenges faced by servicers in building capacity to process large volumes of problem loans,” the company said.
Investments Freddie Mac made in private-label securities backed by subprime loans continue to deteriorate. The company said losses on those investment pools grew to $1.1 billion from $400 million in the second quarter of this year.
Freddie Mac said it is pressing lenders to honor promises to repurchase nonperforming loans, including those in supbrime investment pools, if they were issued based on inaccurate data. Known as representations and warranties, the promises cover defects such as inflated appraisals or inaccurate information about a borrower’s income.
In the three months ending Sept. 30, Freddie Mac had $5.6 billion in unpaid repurchase requests outstanding and had recovered $1.7 billion from lenders. Some of the company’s largest single-family loan servicers collectively had more than a third of repurchase demands outstanding for more than four months, up from 23 percent.
October 21st, 2010
By: Jim Puzzanghera
The taxpayer bailouts of housing finance giants Fannie Mae and Freddie Mac could more than double over the next three years to as much as $363 billion, according to government projections released Thursday.
The Federal Housing Finance Agency, which has regulated the former government-sponsored enterprises since they were seized during the financial crisis in 2008, said the figure was based on the worst of three scenarios for the economy and housing market that assumes a “deeper second recession.”
Under the best-case scenario, which would be a “stronger near-term recovery” in housing prices, the bailouts of Fannie and Freddie would reach $221 billion. The third scenario, in which housing prices continue on their current projections, would result in the combined bailouts reaching $238 billion.
But those figures don’t clearly reflect the actual cost to taxpayers of the bailouts because they include dividend payments to the government on the loans Fannie and Freddie have received. Those costs largely are double-counted as the companies must borrow taxpayer money to pay the dividends to the Treasury Department.
Excluding dividends, the pricetag for the bailouts would range from $142 billion in the best-case scenario to $259 billion in a deep double-dip recession.
So far, Fannie and Freddie have received about $148 billion in taxpayer money since they were seized by Bush administration officials and placed in government conservatorship. Taxpayers now own 79.9% of the two companies.
“These projections are intended to give policymakers and the public useful snapshots of potential outcomes for the taxpayer support of Fannie Mae and Freddie Mac,” said Edward J. DeMarco, FHFA’s acting director. “These are not predictions; the results reflect the potential effects of a limited set of hypothetical changes in house prices, a key variable driving credit losses for the enterprises.”
DeMarco told a House subcommittee last month that taxpayer losses from Fannie and Freddie likely wouldn’t top $400 billion, as some have feared, but did not provide specific data. In December, concerns mounted about the potential cost of the bailouts after the Obama administration lifted a $400-billion cap through 2012.
Officials said they did so to provide certainty to the real estate market that the government would stand behind the agencies as lawmakers and the White House began wrestling with their future. Many Republicans have blamed Fannie and Freddie for triggering the subprime mortgage problems and complained that the recently enacted financial reform law did not deal with the future of the two entities.
But the law did call for the administration to produce a plan by January, and Congress has been conducting hearings on the fate of Fannie and Freddie and the broader question of government involvement in the housing finance market.
Fannie Mae and Freddie Mac are almost singlehandedly keeping the housing finance market going as investors have fled because of the financial crisis and deep recession. Together, they hold about $1.6 trillion worth of mortgage loans.
The additional projected losses would come from further eroding of the value of loans, particularly subprime mortgages, that Fannie and Freddie bought before the government seizures, the FHFA said.
October 18th, 2010
By: Charles Wallace
The country is in the grip of a home mortgage scandal, with big banks facing investigations, fines and penalties for playing fast and loose during the foreclosure process. There’s no question that the banks will suffer, but will their stocks get hurt as a result?
One indication came on Oct. 18, when Citigroup (C) reported a third-quarter profit of $2.15 billion, easily beating analysts’ expectations and sending the company’s shares higher by 5%. That lifted all banks shares, which had lost $50 billion in valuation at the end of the previous week because of concerns about foreclosure losses.
But Citi indicated that it had managed to sidestep the problems facing banking rivals JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC), which have announced moratoriums on foreclosures while they study whether they acted improperly in the process of documenting foreclosures prior to sales. “We believe that our overall process is sound, and our reviews indicate that nothing is amiss,” says John Gerspach, Citi’s chief financial officer.
The current mortgage crisis could hurt bank earnings in several possible ways, not all of them directly related to the foreclosure problem.
Investors to Banks: Take It Back
The first is what the banks have termed “putbacks,” but are really repurchases of mortgages. Most banks don’t keep mortgages on their books any more. Instead, they pool home loans together and sell slices of those bundled securities to investors, who assume the credit and interest rate risk on the underlying loans.
When they sell the loans, the banks make “representations and warrants” to the investors that the borrowers meet certain loan criteria, such as the level of their FICO credit scores or their income. If it turns out later that this information is wrong, the investor can force the bank to repurchase the mortgage from the trust that holds them.
JPMorgan analysts said in a report released Oct. 18 that the putback risk to the industry as a whole might be as high as $55 billion to $120 billion. They said those losses would probably be realized over a period of about five years, so the annual total might run at $10 billion to $25 billion.
Squeezing Every Penny
The JPMorgan estimate was different for loans securitized by government-controlled agencies like Fannie Mae and Freddie Mac. With Congress in an uproar about Fannie’s and Freddie’s losses, now estimated at $140 billion, the government will likely try to squeeze every penny out of the banks that it can, given that they’re now making large profits after being bailed out by taxpayers.
The JPMorgan analysts said the agencies are likely to try to force the banks to take back about 25% of defaulted loans, with about 40% of those demands being successful.
With private sector securitization of mortgages, banks have less recourse to complain about fraud and other misstatements, so repurchases of mortgages would have only a 20% success rate, leading to an estimated 5% loss on defaulted loans.
JPMorgan itself acknowledged this last week when it released its own third-quarter earnings and disclosed that it had put aside an additional $622 million in reserves to cover losses from forced repurchases of mortgages. That didn’t seem to have hurt JPMorgan’s stock: It was up 2.5% on Oct. 18.
Potential Fines and Penalties
Al Savastano, banking analyst at Macquarie Securities in New York, says the repurchase problem is likely to fester for years and that it’s hard to know how much each bank faces in losses. “We think it’s going to be an earnings issue, not a capital issue,” Savastano says. ‘We are a lot more comfortable trying to estimate credit losses than this.”
The other potential cost to banks comes from losses the banks suffer because of their actions in the foreclosure crisis. Treasury Secretary Timothy Geithner said last week that the Obama administration opposes any national moratorium on foreclosures, so losses caused by not being able to sell foreclosed homes are likely to be limited in the short term.
“We believe that the big banks have the capacity to withstand potential setbacks from the foreclosure moratoriums and related issues as they currently stand, and we believe these issues should ultimately prove manageable in the context of large bank franchises,” say CreditSights research analysts.
Based on a potential fine of $25,000 for each false affidavit filed — the banks have to attest that they reviewed each loan file, but in many cases, they didn’t — CreditSIghts estimates JPMorgan could face $2 billion to $3 billion in fines, which could possibly be settled for $500 million to $1 billion. The CreditSights analysts say BofA and Wells Fargo also might face a similar amount.