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Banks Face New Multibillion-Dollar Mortgage Slam: Analyst

Stocks in this article: BAC C JPM WFC USB FBC PNC

NEW YORK ( TheStreet) -- FBR Capital Markets analyst Paul Miller believes that the largest U.S. mortgage loan servicers could be facing billions in losses from Federal Housing Administration (FHA) claims audits.

In its annual report to Congress on Tuesday, the FHA said that its insurance fund declined even further from last year and its capital ratio "measures reserves in excess of those needed to cover projected losses over the next 30 years."

The agency's economic worth has declined to $2.6 billion as of Sept. 30, from $4.7 billion a year earlier.

The FHA insures over $1 trillion in single family mortgage loans, with borrowers paying a monthly premium for the coverage. The agency said that its Mutual Mortgage Insurance Fund, or MMI, had increased to $33.7 billion as of Sept. 30, from $33.3 billion a year earlier, but that its capital reserve ratio was just .024%, falling from 0.50% a year earlier, and far below the 2.00% minimum required by Congress.

The FHA says thr agency projects that its capital ratio will reach the required 2.00% during Fiscal 2014.

FBR Capital Markets analyst Paul Miller said in a report on Wednesday that since the FHA believes that "unless housing prices stabilize, the insurance fund has a 50% chance of running at a deficit," banks fear that "the FHA's worsening financial condition could prompt the agency to audit claims."

When an FHA-insured loan goes bad, the lender files a claim with the agency, which the FHA typically pays-out quickly. Miller said that "due to the state of the FHA's financial position and the possibility of further home price declines, the agency is motivated to take a closer look at claims it has paid out to recoup losses," and that "the agency's hyper-technical servicing requirements make it more likely that servicers, and not originators, could be most at risk in the near term.

Miller said that Bank of America (BAC), Wells Fargo (WFC) and JPMorgan Chase (JPM) faced "the highest level of losses given their high volume of FHA originations and robust servicing portfolios," with potential claims denials to loan servicers costing $13.5 billion, and another $11.5 billion in costs to the industry if the FHA also targets lenders.

  • For Wells Fargo, Miller estimates potential losses of $3.55 billion as a servicer and another $3.29 billion in losses as a lender.
  • Bank of America could face $2.33 billion in losses as a servicer and $2.12 billion in losses as a lender.
  • For JPMorgan Chase, FHA claims denials could lead to losses of $1.39 billion as a servicer and 1.42 billion as a lender.
  • Citigroup's (C) losses as a servicer from FHA claims denials could total $1.66 billion, while its losses could total $810 million.
  • U.S. Bancorp (USB) could lose $760 million as a servicer and $700 million as a lender.
  • Flagstar Bancorp (FBC) faces "implied losses" of $300 million as a servicer and $390 million as a lender from FHA claims denials.
  • For PNC Financial Services (PNC), the analyst estimates that losses from FHA claims denials as a loan servicer could total $240 million, while the company's losses as a lender could total $210 million.

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