Bank mortgage buyback losses seen bigger risk

CHARLOTTE, North Carolina (Reuters) - U.S. banks, under fire for their foreclosure practices, face a much bigger threat from demands by investors that they buy back mortgages that fail to meet their sales description, J.P. Morgan analysts said.

Banks could be forced to repurchase up to $120 billion of mortgages from third-party investors over five years, the analysts said, arguing this so-called putback risk “may be the biggest issue facing banks.”

“That said, we believe that some analysis and media reports have vastly overestimated the significance of many of these factors and the corresponding cost to the industry,” the J.P. Morgan analysts said in the note to clients dated October 15.

The mortgage industry has come in for sharp criticism in recent weeks over shoddy paperwork used to support foreclosures.

Some industry analysts and investors fear the documentation crisis could lead to losses for lenders in the form of escalating foreclosure costs and doubts over the underpinnings of the mortgage securitization market, including the record-keeping that tracks ownership of home loans.

“In our view, many of the mortgage foreclosure problems highlighted in the past few weeks are process oriented and can be fixed in the near term,” said J.P. Morgan.

Bank of America BAC.N said on Monday it was partially lifting its nationwide freeze on foreclosures, a sign that the furor over foreclosure documentation may be easing.

Other analysts are projecting losses of $50-$60 billion on mortgage repurchases from government entities, like Fannie Mae and Freddie Mac, and third-party investors who hold home loans in mortgage-backed securities.

Fannie Mae and Freddie Mac, the largest providers of U.S. mortgage financing, buy up mortgages from banks and other originators to keep mortgage markets liquid. Some of the debt is repackaged as securities and sold to investors.

Sheila Bair, chairman of the Federal Deposit Insurance Corp, was asked on Monday if putbacks post a risk to banks’ balance sheets.

“We don’t know that yet,” Bair said on the sidelines of a speech in Baltimore that did not address the foreclosure issue.

One issue emerging as a threat to banks hinges on ownership of the mortgage note, which is often transferred multiple times after a loan has been packaged into a bond. In many cases, the original note may have been lost or incorrectly endorsed in the transfer, according to Barclays Capital, raising a potentially catastrophic issue in the $11 trillion U.S. mortgage market.

This may also result in a barrage of “produce the note” lawsuits by investors, who may claim breach of representations and warranties kept them from foreclosing.

David George, Robert W. Baird & Co bank analyst, in a research note on Monday, projected that three of the largest U.S. mortgage servicers face absorbing $13.1 billion in repurchase losses. Those include $6.1 billion at Bank of America, the largest U.S. mortgage servicer, $4.7 billion at Wells Fargo & Co WFC.N and $2.7 billion at JPMorgan Chase


“Investors didn’t obviously need another log on the proverbial fire to deal with, in our opinion, and are selling first and asking questions later,” said George in the research note.

But analysts said lenders would able to absorb the hit over years through earnings, instead of the large credit write-downs that banks took in short order at the height of the financial crisis.

Banks, analysts said, are healthier now than in fall 2008, and have profitable businesses that can help mitigate mortgage buy backs.

Credit Suisse bank analysts revised their earnings per share projections for U.S. regional banks down by 1 percent on Monday, because of added legal costs from 2011-2013, higher nonperforming assets and reduced profitability due to mortgage concerns.

Reporting by Joe Rauch; Editing by Leslie Adler and Tim Dobbyn