Tuesday, 2 November 2010

Repo Man - The Repo Mess and the Housing Funk

It's 4 AM.
Do you know who owns your house?

Ask the Repo Man...

The big issue of mortgage repurchase obligations for big banks is a hot topic and represents for them serious headwinds.

Bank of America bears the highest mortgage repurchase risk to earnings according to CreditSights, mostly due to the "ill-fated" acquisition of Sunny Subprime-Alt A mortgage player Countrywide (Countrywide was bought for 4 Billion USD in January 2008.). The former Countrywide tanned CEO Mozilo settled for a cool 67.5 millions USD fine with the SEC (although he bailed out early and made a juicy 129 millions USD in 12months in 2007, selling shares). Bank of America shareholders are left on the hook for more pain to come unfortunately. Please also note that out of the 67.5 Millions settlement fine, Countrywide (now Bank of America...) will pay 20 millions USD of it.


This is what we can read from the Bloomberg article as indicated above regarding the situation for Bank of America and the foreclosure mess they are facing.

"Delinquencies and defaults kept rising through the recession of 2009 and into this year. Today, of the 14 million Bank of America mortgage customers, 1.3 million are in some form of delinquency, including 195,000 who haven’t made a payment in more than 2 years. The troubles prompted the bank to triple its loan workout staff to 18,000 in the 18 months ended in October."

"Fannie Mae, Freddie Mac, mortgage insurers and other investors had made $12.9 billion in claims on BofA as of Sept. 30. Those demands may eventually exceed $35 billion, says Christopher Gamaitoni, vice president at Compass Point Research and Trading LLC in Washington. During the five quarters ended on Sept. 30, the bank had approved repurchase of loans with a face value of $4.9 billion, it announced on Oct. 20."

But it is not only Bank of America who is feeling the heat on the housing funk and the repo mess...JP Morgan Chase is on the hook as well thanks to its acquisition of Washington Mutual (WAMU) in September 2008 according to an article in Bloomberg:


"JPMorgan did buy WaMu in September 2008 after it was seized by the Federal Deposit Insurance Corp., which meant the assets came at a bargain price of $1.9 billion, Bloomberg Markets magazine reports in its December issue.

The 2,200 WaMu branches in California, Washington and 12 other states gave JPMorgan’s consumer bank, Chase, a total of 5,410 branches -- the second-biggest network in the nation. And it moved Chase to first from third in deposits, with $905 billion after the deal closed.

Dimon, 54, got what he wanted -- and a lot that he didn’t want. JPMorgan is now saddled with $74.8 billion in nonperforming home loans inherited from WaMu, a third of the $230.7 billion in mortgages on its books."

"Both the WaMu mortgages and JPMorgan’s own home-equity loans are spilling red ink."

"In addition to the WaMu losses, Dimon has to deal with $113 billion in risky subprime, home-equity and adjustable-rate loans that JPMorgan originated."

The housing funk:

"The debacle in the housing market is still the biggest headache for U.S. banks. Payments on some 8 million U.S. mortgages were delinquent in late September, and almost 7 million of those may end up in foreclosure, says Laurie Goodman, a senior managing director at Austin, Texas-based Amherst Securities Group LP.

11.5 Million Seizures

Those projections exclude the 200,000 additional borrowers that become delinquent each month for the first time, she says.

In total, Goodman estimates that 11.5 million homes could be repossessed by banks during the next five years."

This will keep the Repo Man very busy...

The SEC is stepping in:


“Items that should be considered include, without limitation, the impact of various representations and warranties regarding mortgages made to purchasers of the mortgages (or to purchasers of mortgage-backed securities) including to the government-sponsored entities (GSEs), private-label mortgage-backed security (MBS) investors, financial guarantors and other whole loan purchasers.”

"Investors have been pressuring the banks for refunds on billions of dollars of securities. Earlier, we reported that Bank of America creditors are demanding for a repurchase of mortgage-backed bonds valued at $47 billion which was assembled by Countrywide Financial."

The sharks are circling the wounded banking whale, and they ain't no small sharks: PIMCO, BlackRock (Bank of America owns 34% of BlackRock),as well as the New-York Fed.


"In testimony before the Congressional Oversight Panel yesterday, Katherine Porter, a University of Iowa law professor and expert on mortgage servicers, noted that despite banks' attempts to narrowly characterize the problems as minor technicalities, the flaws in the process are far from fixed:

The problems in such cases range from the imposition and collection of improper fees, a lack of standing to foreclose in judicial foreclosure states, the pursuit of foreclosure without rights in the note and mortgage, mortgage origination fraud, or liability to investors for poor underwriting or improper servicing. The key point is that the vast majority of the alleged problems cannot accurately be described as "technicalities."

"Because [the banks] are being allowed to control the definition of error and are being allowed to audit themselves, we cannot have confidence in such reports," Porter noted."



“This isn’t the other shoe dropping,” says Barry Ritholtz, a lawyer and investment expert and the CEO of Fusion IQ. “This is the third iceberg.”

"The ultimate lesson in all this? Ritholtz sees it as further proof that when a firm screws up, taxpayers should not ride to the rescue. “This goes back to why you don’t bail out banks,” he says. “You don’t know what other shortcuts were on the books.”

Will Bank of America be forced to buy back these Mortgage backed securities? The implications for large players in that space (JP Morgan, Wells Fargo, etc.) could be serious. As I previously posted, there is a strong need for a new RTC to be set up. Problems are adding up for banks, faster than the balance sheets are being repaired thanks to zero rate policy and Quantitative Easing. TPC from the excellent Pragmatic Capitalism website, argues that QE2 is aimed at Wall Street, yet again, not Main Street.

Another story to follow closely.

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