July 5 - The continuing flow of mortgage repurchase requests by Fannie Mae
and Freddie Mac shows no signs of ending quickly, and the
effects of increased representation and warranty claims on the financial results
of some U.S. banks are likely to grow in the near term. Fitch Ratings sees the
potential for midtier financial institutions, including some large regional
banks, to feel material claims-related earnings pressure as uncertainty over
future mortgage buyback requirements persists.
As outlined in previous special reports, we continue to view steadily rising
repurchase claims as a source of moderate credit risk for affected U.S.
Recent announcements by PNC, Suntrust, and First Horizon note that they intend
to boost reserves against future government-sponsored enterprise (GSE) mortgage
repurchase claims suggest that the GSEs may be sharpening their focus on
recovery at regional institutions.
This would represent a significant shift in claims activity away from the five
largest U.S. mortgage originators (Bank of America, JP Morrgan, Citigroup, Wells
Fargo, and Ally Financial), which up until now have collectively accounted for
more than 85% of claims by the GSEs and private label securities (PLS) holders
seeking recovery on defaulted loans where representation and warranty breaches
may have occurred in the origination process.
Outstanding repurchase claims at those five institutions stood at $24.7 billion
as of March 31 -- up almost 20% over first-quarter 2011. Among the top five
banks, Bank of America faces the largest outstanding claims, representing about
60% of the total for all of the large originators. However, the outstanding
claims total at Bank of America has been inflated by the ongoing dispute between
the bank and Fannie Mae over the scope of claims related to breaches of
representations and warranties on defaulted loans.
In light of this fact, and because future GSE claims still appear unlikely to
impair capital positions materially, we do not expect the level of repurchase
claims, viewed in isolation, to have a large impact on U.S. bank ratings. The
June 27 downgrade of First Horizon reflected not only the impact of a large
mortgage loss provision, but also ongoing weakness in earnings trends. Still,
unexpectedly large claims-related reserve increases in second-quarter 2012
results or later in the year could represent negative factors with the potential
to affect future bank ratings.
Regional banks still face costs related to litigation and repurchase claims for
private label MBS issuances. However, we believe these should be significantly
smaller than similar costs faced by the largest banks that were most active in
For additional analysis of the impact of GSE and PLS repurchases on U.S. banks,
see our previous special reports on the issue: "Private-Label Representations
and Warranties," dated July 27, 2011 and "U.S. Banks' Mortgage Repurchase
Risks," dated Feb. 3, 2011, at www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research:
Private-Label Representations and Warranties
U.S. Banks' Mortgage Repurchase Risks: GSE Claims Abate as Private-Label Remains