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Feb. 3, 2010, 2:03 p.m. EST · Recommend (10) · Post:
By Alistair Barr, MarketWatch
SAN FRANCISCO (MarketWatch) -- Just when they thought the worst of the mortgage crisis was behind them, billions of dollars in bad loans from the debacle may be rising from the dead and creeping back on the balance sheets of the largest U.S. banks.
Big lenders including Bank of America /quotes/comstock/13*!bac/quotes/nls/bac (BAC 14.86, -0.67, -4.31%) , J.P. Morgan Chase /quotes/comstock/13*!jpm/quotes/nls/jpm (JPM 38.79, -1.50, -3.72%) and Wells Fargo /quotes/comstock/13*!wfc/quotes/nls/wfc (WFC 27.30, -0.84, -2.99%) may be forced to repurchase troubled home loans from insurers and mortgage-finance giants like Freddie Mac /quotes/comstock/13*!fre/quotes/nls/fre (FRE 1.17, -0.02, -1.68%) that had agreed to take on risks associated with those assets during the real estate boom.
The banks are setting aside more reserves to cover the potential costs of such repurchases, cutting into earnings.
Hedge fund manager Robert Appleby has a longtime passion for amphibians. His philanthropic funding for the study of frogs has resulted in the discovery of a new species named after him, Lam Thuy Vo reports.
The trend is also pitting big lenders, insurers and mortgage-finance institutions against each other. That's a big change from the previous decade, when they worked together to fuel the housing boom by originating, insuring and securitizing mortgages in record amounts.
Christopher Whalen, managing director of research firm Institutional Risk Analytics, offered up a colorful metaphor for the unfolding situation.
"The wave of loan repurchase demands on securitization sponsors is the next area of fun in the zombie dance party, namely the part where different zombies start to eat each other," Whalen wrote in a note to clients Tuesday.
Mortgage insurers such as MGIC Investment /quotes/comstock/13*!mtg/quotes/nls/mtg (MTG 6.15, -0.47, -7.10%) have rescinded, or refused to pay, roughly $6 billion in claims from delinquent home loans since January 2008, rating agency Moody's Investors Service estimated in a December report. That could leave banks that originated the loans on the hook for losses.
Bond insurers are expecting to recover more than $4 billion from banks for breaches of representations and warranties on residential mortgage-backed securities they guaranteed, Moody's also noted.
'All parties in the mortgage chain are taking a look at their rights and looking to bring claims.'
Michael Cavanagh, J.P. Morgan Chase
"Depending on how things go it certainly could go much higher than $10 billion," said James Eck, a senior analyst in Moody's Specialty Insurance team.
Meanwhile, government-controlled mortgage-finance giants Fannie Mae /quotes/comstock/13*!fnm/quotes/nls/fnm (FNM 0.98, -0.03, -2.63%) and Freddie Mac are also getting in on the act, potentially forcing banks to repurchase billions of dollars more in bad loans.
In the first nine months of 2009, firms that collect payments on mortgages guaranteed by Freddie Mac repurchased home loans with a total unpaid balance of $2.7 billion. That was up from $1.2 billion in the same period of 2008, Moody's noted.
Bank of America and Wells Fargo may be particularly exposed on this front, according to Institutional Risk's Whalen.
Fannie and Freddie "are going to tear 50-100 basis points easy out of the flesh of the banking industry in the form of loan returns," he wrote.
Wells Fargo said last month that $1.2 billion in fourth-quarter income from mortgage loan originations and sales included a $316 million increase in reserves to cover loan repurchases. The bank disclosed no such reserves in its third-quarter earnings release.
It's a similar situation at Bank of America. Joe Price, the company's head of consumer banking, told analysts last month that the company has billions of dollars in reserves lined up to cover loan repurchases and related disputes with Fannie, Freddie and insurers.
'We wanted to make sure we were paying all appropriate claims, not inappropriate claims.'
- BStrayer | 2:06 p.m. Feb. 3, 2010
Call it the adolescent indicator: If kids are spending, does that mean the economy has finally turned the corner?
8 min ago2:55 p.m. Feb. 4, 2010 | Comments: 15
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