Stop Bashing the Banks: Analyst

NEW YORK ( TheStreet) -- FBR Capital Markets analyst Paul Miller says it's time for U.S. regulators to "stop the madness" of mortgage putback claims that are threating the economic recovery.

Following the Federal Housing Finance Agency's announcement after Friday's market close of lawsuits demanding the repurchase of $196 billion in private-label mortgage-backed securities from 17 large banks, Miller published a report on Monday with updated estimates for large banks' potential losses from mortgage putback demands.

According to FBR's revised estimates, which incorporate the FHFA's lawsuits and "may be overly conservative," the entire mortgage industry is facing repurchase losses of $121 billion but the analyst adds, "does anyone really know?"

The figure includes $40.19 billion in total losses from mortgage repurchase demands now being faced by Bank of America ( BAC), while JPMorgan Chase ( BAC) is looking $21.17 billion in mortgage putback losses, according to FBR. Rounding out the "big four" U.S. banks, Miller estimates that Wells Fargo ( WFC) could lose $6.41 billion from mortgage repurchase claims, followed by $4.76 billion for Citigroup ( C).

As the regulator of Fannie Mae ( FNMA) and Freddie Mac ( FMCC) -- which were taken into government conservatorship three years ago -- the FHFA is mandated to go seek recovery of any losses. But Miller thinks enough is enough since the government putback demands "drain capital from the banking system, and they cause banks to overly tighten credit standards, which pushes potential homebuyers onto the sidelines."

According to Miller, the U.S. government lacks a coordinated response to the mortgage mess, which is why the housing agencies "are acting in their own self interest as opposed to that of the broader U.S. economy."

Investors are anticipating President Obama's address to a joint session of Congress on Thursday that is expected to feature a large highway construction project as the centerpiece to a job creating package.

The president has not, to date, suggested a coordinated approach to settling the mortgage mess. Such a large lawsuit by the FHA against many of the banks that were bailed-out by the government just three years ago could stifle a recovery for the housing market and the overall economy, and threaten his chances for reelection .

The analyst believes that "the GSEs and other parties should back off their repurchase claims in order to encourage Bank of America and JP Morgan to be major providers of residential loans again." Miller thinks the mortgage lenders will ultimately settle with the FHFA, since "it's our understanding that banks have admitted to making serious missteps in the underwriting process and when selling subprime and 'alt-a' securities," and that "banks would rather settle and move on from this than engage in a drawn out legal battle."

Putting a further chill on the prospects of a housing recovery, Miller sees problems "on the horizon" for the Federal Housing Administration, as "the FHA insurance program could have trouble paying off claims as the $34 billion of capital resources are being held against a portfolio with $139 billion of delinquencies that are barely seasoned."


-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.