First Horizon Ups Its Bad Mortgage Risk

NEW YORK ( TheStreet) -- First Horizon National Corp. ( FHN) late on Monday announced second-quarter charges of $272 million "for mortgage repurchase and litigation matters."

In what is likely to be a trend, considering the more aggressive stance taken by the government-sponsored mortgage giants Fannie Mae ( FNMA) and Freddie Mac ( FNCC) in pursuing mortgage putback claims against lenders selling mortgage loans originated from 2005 through 2008, First Horizon said it decided to increase its mortgage repurchase reserve from $161 million as of March 31, after the company "obtained significant new information from Fannie Mae" on sold loans the company was no longer servicing.

Fannie Mae and Freddie Mac -- together known as the government-sponsored enterprises, or GSEs -- were taken under government conservatorship in 2008.

First Horizon now expects "to realize approximately $60 million of loss which will be charged against the reserve," leaving its June 30 mortgage putback reserve at an estimated $351 million as of June 30. The company said that "unless GSE repurchase practices or outcomes change significantly, First Horizon expects that the mortgage repurchase reserve established as of the end of the second quarter will be sufficient for losses resulting from current pending and projected repurchase requests from the two GSEs."

Freddie Mac previously said in its first-quarter 10-Q filing that its revised loan sampling methodology "could further change in ways that further increase our repurchase request volumes with our seller/servicers."

First Horizon said that including the second-quarter losses, the company's cumulative mortgage putback losses totaled about $750 million, or 1.3% of $57.6 billion in mortgage loans sold to Fannie and Freddie from 2005 through 2008.

Regarding private-label mortgage putbacks, First Horizon said it was "not aware of new lawsuits or material new formal repurchase demands by third parties seeking repurchase, rescission, or damages related to loans sold in connection with private securitizations."

During a conference call late on Monday, First Horizon National CFO William Losch expressed confidence that the company wouldn't see further unexpected rises in mortgage loan putback demands from Fannie Mae, as the GSE had given "a view of how they've historically selected loans for repurchase requests, how they anticipate to select loans, both liquidated and delinquent, in the future, and gave us a lot of insight into how they come up with that." Losch added that "our cumulative average rescission rates that we've talked about for several quarters, average loss severity, were generally consistent with what we saw in the new data."

First Horizon in April increased its share buyback program to $200 million, after repurchasing $44.5 million worth of common stock during the first quarter. CEO Bryan Jordan said during the conference call that "we don't see this, in isolation, having an impact on our repurchase program."

First Horizon's shares closed at $7.91 Monday, down 1% year-to-date, following a 32% decline during 2011.

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The shares trade for 0.9 times their reported March 31 tangible book value of $8.78, and for 10 times the consensus 2013 earnings estimate of 80 cents a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is 53 cents.

FBR analyst Paul Miller on Monday reiterated his "Underperform" rating for First Horizon, while lowering his price target for the shares to $6.50 from $8.00 and lowering his second-quarter 2012 EPS estimate to a loss of 56 cents from earning of 11 cents a share. The analyst lowered his full-year 2012 EPS estimate to a loss of 30 cents from earnings of 45 cents, and lowered his 2013 EPS estimate to 50 cents from 68 cents.

Miller said First Horizon's second-quarter charge would work out to "$177M after-tax or $0.69 per share" and also said that "the company has yet to receive material private-label repurchase requests where it has meaningful exposure," and that "while its securities are performing relatively well, we believe private-label putbacks could ultimately prove to be costly."

FBR estimates that First Horizon "still needs to work through approximately $1.0 billion of expenses before putting mortgage repurchases to rest."

KBW analyst Jefferson Harralson late on Monday reiterated his "Market Perform" rating for First horizon, with an $8.00 price target, saying that "while agency exposure now appears mostly ring-fenced, private label remains relatively unknown with FHN providing little additional color."

Harralson estimates that First Horizon will post a second-quarter net loss of 60 cents, and lowered his 2012 EPS estimate to a loss of 10 cents, from earnings of 30 cents. The analyst left unchanged his 2013 EPS estimate of 65 cents.

Interested in more on First Horizon? See TheStreet Ratings' report card for this stock.


-- 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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