Bank Stocks Reinfected With Mortgage Putback Worries

NEW YORK ( TheStreet) -- Four years on, banks are still seeing increases in mortgage putback demands that are again pressuring shares following the recent Moody's debt downgrade.

A more aggressive stance on mortgage repurchase demands by Fannie Mae ( FNMA) and Freddie Mac ( FMCC) -- the two government-sponsored mortgage giants, or GSEs, that were taken under government conservatorship in September 2008 -- is prolonging the mortgage mess for several of the nation's largest lenders, which are taking their time about settling the GSE putbacks.

Freddie Mac
Freddie Mac reported that as of March 31, its outstanding mortgage loan repurchase requests -- based on unpaid principal balances (UPB) -- totaled $3.229 billion, increasing from $2.716 billion at the end of 2011. That's a 19% increase over just three months.

Large mortgage lenders have traditionally preferred to sell newly originated mortgage loans conforming to GSE guidelines as quickly as possible, aiming for a quick profit, while retaining servicing, for which they have been paid an ongoing servicing fee by the GSEs. Freddie reported that as of March 31, Wells Fargo Bank N.A. (the main subsidiary of Wells Fargo ( WFC)) serviced 26% of the GSE's single-family mortgage loans, while JPMorgan Chase Bank, N.A. (held by JPMorgan Chase ( JPM)) serviced 12% and Bank of America N.A. (the main banking subsidiary of Bank of America ( BAC)) serviced 11% of the single-family loans.

Freddie said that "as measured by UPB, approximately 38%... of the repurchase requests outstanding at March 31, 2012... were outstanding for four months or more since issuance of the initial request," which includes repurchase requests for which appeals are pending. The servicers often appeal the repurchase requests and see them cancelled once the GSE receives sufficient documentation to determine that the lender, or the seller/servicer, properly underwrote and serviced the loan.

Freddie also said that as of March 31, $155.8 billion, or 9% of its total single-family mortgage loans were covered by agreements with the seller/servicers, releasing the servicers from "certain repurchase obligations in exchange for one-time cash payments." The Federal Housing Finance Agency, which regulates Freddie and Fannie, in September suspended announced it had "certain future repurchase agreements with seller/servicers concerning their repurchase obligations pending the outcome" of Freddie Mac's review of its loan sampling methodology. Freddie entered no further agreements to release servicer's repurchase obligations through the first quarter.

Freddie said that its revised loan sampling methodology "could further change in ways that further increase our repurchase request volumes with our seller/servicers."

Fannie Mae
Fannie Mae reported that as of March 31, its total mortgage loan repurchase requests by outstanding balance increased to $12.153 billion from $10.400 billion at the end of 2011, for a 17% increase during the first quarter. Of the new total, $4.259 billion in requests had been outstanding for over 120 days.
  • Fannie's repurchase demands to Bank of America, N.A. totaled $7.057 billion as of March 31, increasing from 30% from $5.449 billion as of Dec. 31.
  • Demands for JPMorgan Chase Bank, N.A. to repurchase mortgages increased to $1.251 billion from $1.136 billion.
  • Demands for CitiMortgage (a subsidiary of Citigroup (C)) to repurchase mortgage loans from Fannie increased to $955 million as of March 31, from $917 million as of Dec. 31.
  • Fannie's outstanding repurchase demands to Wells Fargo Bank, N.A. declined to $797 million, from $830 million.
  • Fannie's demands for SunTrust Bank, Inc. (the main banking subsidiary of SunTrust (STI)), to repurchase mortgage loans declined to $380 million as of March 31, from $430 million as of Dec. 31. SunTrust
  • Fannie Mae's outstanding mortgage purchase demands totaled $$1.713 billion as of March 31, increasing from $1.638 billion as of Dec. 31.

Fannie has agreements in place to "resolve certain outstanding repurchase requests" with CitiMortgage, Wells Fargo and SunTrust.

Fannie also reported that Bank of America had "slowed the pace of its repurchases," and that "as a result of Bank of America's failure to honor its contractual obligations in a timely manner, the already high volume of our outstanding repurchase requests with Bank of America increased substantially." The GSE also said that "Bank of America accounted for 71% of our repurchase requests that had been outstanding for more than 120 days as of March 31, 2012, compared with 59% as of December 31, 2011," and that one of the steps it took to address Bank of America's "delays in honoring our repurchase requests" was not renewing the "existing loan delivery contract with Bank of America at the end of January 2012, which significantly restricts the types of loans it can deliver to us."

Bank of America said in its quarterly filing that its outstanding repurchase requests from Fannie and Freddie increased to $8.1 billion as of March 31 from $6.3 billion in December, and that "we continue to experience elevated levels of new claims from the GSEs, including claims on loans on which borrowers have made a significant number of payments (e.g., at least 25 payments) or on loans which had defaulted more than 18 months prior to the repurchase request, in each case, in numbers that were not expected based on past practices," and that "the criteria and the processes by which the GSEs are ultimately willing to resolve claims have changed in ways that are unfavorable to us."

Bank of America continues to sell loans made through President Obama's expanded Home Affordable Refinance Program, or HARP 2.0, which allows mortgage loan borrowers with loans held by Fannie or Freddie to refinance their homes at today's historically low rates, no matter how much the value of the collateral property has declined.

since the "GSEs continue to pursue claims aggressively," FBR analyst Paul Miller on Friday raised his "estimate for industrywide losses for GSE and private-label reps and warrants claims to $130 billion from $110 billion" with detailed loss exposure estimates for four major servicers.

Miller said that Bank of America "is currently not paying claims from the GSEs per our sources," with the dispute centering on "whether the agencies can push back loans if the borrower remained current for two-plus years" before defaulting. While FBR believes "Bank of America has a strong argument that defaults after the initial 24-month period are generally more economically driven than affected by underwriting standards," Miller raised his total mortgage putback loss estimate from the company to $53.267 billion from $42 billion, adding that Bank of America "still has exposure to a number of private-label putbacks, including a pending $8.5 billion settlement for a portion of these loans."

The analyst estimates that Bank of America has already realized $31.704 billion in mortgage putback losses.

Miller estimates that JPMorgan Chase faces total mortgage repurchase loss exposure of $16.604 billion, having already realized $9.901 billion in losses.

For Wells Fargo, Miller estimates total mortgage putback exposure of $$8.485 billion, with $3.436 billion in losses already realized.

The analyst estimates that Citigroup is looking at potential mortgage repurchase exposure of $5.669 billion, having realized $4.235 billion in losses to date.

For SunTrust, Miller estimates total putback exposure of $3.995 billion, with $2.421 billion having already been realized.

Miller said that "ultimately, repurchase losses from private residential mortgage backed securities should be manageable, but recent suits could pose a negative headwind for the industry."

-- 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.

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