Bank of America Reps And Warranties Reserve Surges Five-Fold As Claims Rise Steadily

Tyler Durden's picture

Three months ago, in light of the then released news that various parties among which the New York Fed and PIMCO are seeking to putback $47 billion worth of mortgages to Bank of America, we looked at the bank's reserve for reps and warranties and came to the conclusion that it was woefully underreserved (see: Can You Spell U-N-D-E-R-R-E-S-E-R-V-E-D? If Not, Here Is A Visualization Aid). Today, to our complete lack of surprise, we find that the Bank's reserve for such demands has exploded nearly five fold to a number that is probably the highest in history, at $4,140 million compared to a tiny $872 million in Q3, primarily driven by the settlement by Fannie and its sell out General Counsel Tim Maoypoulos. This is also the main reason for the bank's huge "charge" today which caused Earnings to be well below expectations. That said, that particular settlement is just the beginning of the firm's putback woes. Of course, what the bank is doing here is pretending this is a one time charge and hoping investors will give it credit for the Q3 number being the trendline, as opposed to the Q4, when it is precisely the reverse. Furthermore, we predict that soon enough declining reserves in all other categories will soon be reversed much higher as the sad reality of the US consumer, who has already extracted all benefits from not paying a mortgage, will become very evident and bank charge off ratios will be the first to suffer.

Here is Brian Moynihan's explanation for this dramatic deterioration:

  • 4Q10 representations and warranties provision of $4.1B increased as the current quarter included $3.0B in provision relating primarily to the impact of previously announced agreements with GSEs
  • $8.0B of claims were resolved during the quarter, including $4.9B as part of the GSE agreements, leading to an overall $2.3B  reduction in claims
    • Monoline claims outstanding continue to grow as the monolines continue to submit claims and are generally unwilling to withdraw claims despite evidence refuting the claims
    • $1.9B in claims were received during the quarter from whole loan and private label securitization investors substantially related to 2005 through 2007 origination vintages
  • Increase in rescissions and approvals in 4Q10 was substantially impacted by the previously announced agreements with the GSEs

And since the bank is fully aware that investors will be scrutinizing its now allegedly criminal (see Allstate case) loan origination practices, it has provided the following breakdown:

Non-GSE Experience –2004-2008 Originations

From 2004 through 2008, $963B of loans were sold into private label securitizations or through whole loan sales

Origination Issuer

  • 74% originated through Countrywide
  • 10% originated through legacy BAC
  • 7% originated through legacy Merrill Lynch
  • 9% originated through other legacy firms

Originations by Product

  • 31% were prime originations
  • 18% were Alt-A originations
  • 16% were pay option prime originations
  • 26% were subprime originations
  • 9% were second lien originations
  • Repurchase claims activity through December 31, 2010:
    • $13.7B of repurchase claims received on 2004-2008 vintages
      • $5.6B in claims from monolineinsurers
      • $5.7B in claims from whole loan buyers
      • $1.7B in demands from private label securitization investors who do not have the contractual right to demand repurchase of loans directly
      • $800M in claims from one counterparty submitted prior to 2008
    • $6.0B of resolved repurchase claims on 2004-2008 vintages
      • $800M resolved with monolines; 15% were rescinded or paid in full (mostly second lien)
      • $5.2B resolved with private investors; 59% were rescinded
    • $7.7B repurchase claims remain outstanding on the 2004-2008 vintages
      • $4.1B have been reviewed and declined for repurchase
      • $1.7B in demands from private label securitization investors who do not have the contractual right to demand repurchase of loans directly
    • Repurchase losses of $1.7B
      • $630M related to monolines
      • $1.1B with private investors
  • Experience to date reflects:
    • 22.4% of loans sold have defaulted or are severely delinquent
  • 58% ($126B) of defaulted or severely delinquent loans made at least 25 payments prior to default or delinquency
    • Only a portion of these defaulted or severely delinquent loans will be the subject of a repurchase demand and only a portion of those would ultimately be repurchased
  • Significant differences between GSE and private label representations and warranties deal terms (slide 21)
  • Although non-GSE claims experience remains limited, we expect additional activity in this area going forward
    • It is possible that additional losses may occur
    • Various scenarios were evaluated as part of our planning process
    • A preliminary estimate of possible upper range of loss could be up to $7B to $10B over existing accruals
      • It does not represent a probable loss
      • It is based on current assumptions and is necessarily subject to change
      • A significant portion of this possible range of loss relates to loans originated through Countrywide prior to our acquisition
    • Counterparties and their claims still have significant legal and procedural hurdles to overcome
    • We expect resolution of these matters to be a protracted process, could take years to conclude
    • If valid claims are presented in accordance with contractual rights, loan repurchase claims will be processed appropriately
    • Where no such valid basis for a repurchase claim exists, we will vigorously contest any requests for repurchase

And tangentially, and confirming that banks are only that just in name, the firm's sales and trading revenues plunged sequentially from $4.5 billion to $2.6 billion and validated our observations that in Q4 trading virtually stopped. Q1, unfortunately, is so far not any different.

Full Q4 report

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doomandbloom's picture

any provisions set aside for Wikileaks?

BlackSea's picture

Yes, high-priced escorts will be provided upon demand.

gold mining ceos are idiots's picture

There is something very wrong with the jovial attitude on CNBC as an overwhelming majority of people in the US are in dire straits. I find their clueless attitude disgusting.

BlackSea's picture

They find your lack of faith disturbing.

Bob's picture

Tepper just gave an impassioned appeal for donations to community food banks and said that this is the new normal.  Yet he remains bullish on business . . . primarily due to multi-national corps and off-shore business.

Catullus's picture

Which leads to the obvious question: what the fuck Wells Fargo? Someone is supposed to believe that Wachovia book was in any better shape than Countrywide?

Cdad's picture

Its all fictional, man.  All of these banks are making it up...faking it...and hoping things will turn in one more quarter.  Wachovia, Countrywide, JP Morgan, Blight on America....all the same crap.

Commander Cody's picture

I still say that:

Moynihan musta been out drinkin' and missed the memo from the FASB on how to cook the books to show a profit.

kentfinance's picture

doesn't matter. BAC up 1%. guess all the bad news is out. wtf?

SheepDog-One's picture

Cdad exactly...its all maddening but when the music soon stops and all these Wall St whores are pulled limb from limb by the rioting mobs, WE can LAUGH and LAUGH!

TheProphet's picture

Exactly. I would guess worse. Golden West was nothing but a steaming pile of Alt-A pick-a-payment loans.

SashaBelov's picture

Could you make prediction how much further can they cook their books? Is it still relevant to bet they will go bankrupt in next 3 to 4 years?

Bob's picture

I wondered if that was the explanation for the miss.  Yet $4B in reserves is still a bad joke. 

But how 'bout them bonuses?

jus_lite_reading's picture

Last Nov I made a guesstimate at what time frame BofA's total accumulated losses would hit the fan and reached the conclusion May 2011. After these results, I have to say, the fireworks might begin as early as next month as the worlds 2nd most insolvent bank battles the winds... T-15

Additionally, I shuffled around the placement of the worlds most involvent banks- notching up 3 places is Deutsche Bank to number 4. When the cajas turns to kaka, DB might take the number 2 spot... keep your eyes on it

Dagny Taggart's picture

putbacks? The Fed would prefer the term "mulligan."

SheepDog-One's picture

Gambling is ILLEGAL sir, and I NEVER slice!!

Seasmoke's picture

just look at the HELOCS !!!!!!!

SheepDog-One's picture

AH yes, the clown in the storm sewer, FTW.

downrodeo's picture

"Ohh yes... They Float Brian... They Float... and when your down here, with me... YOU FLOAT TOO!"

Lndmvr's picture

And I thought this meant Macdonalds was feeding the homeless.

Problem Is's picture

What's Cramer doing down there?

Hephasteus's picture

You deliver much in the chuckle department lately.

You are bringin it.

TheProphet's picture

TD, are they still booking as income the interest on loans in stasis between default and foreclosure?

Were there any write downs of previously-booked interest income?

Tyler Durden's picture

Great question. I am certain it will not be asked on the earnings call.

slaughterer's picture

Can't we get Bove to mention these relevant questions on CNBC if he does not commit suicide beforehand?   

slaughterer's picture

If GS is the vampire squid, then BAC is the ....?

Cdad's picture

Blight on America bank is a flesh eating zombie.  Every day that it continues to stumble around and thwart accounting laws and NOT realize its losses, the nation waits for better days and recovery.

This is not difficult stuff.  I know E. Burnett thinks it is simply a matter of infusing enough adorableness to make things better and more confident...but that IS NOT HOW MARKETS WORK!

So...let's pretend for another morning, I guess...pretend that D. Tepper matters more than Truth, Title, Law, etc.  Ok...whatever...

asteroids's picture

If Cramer is bullish, the ponzi continues. If not then we stand a good chance of a correction. Watch what that man says carefully.

jus_lite_reading's picture

The more pretending by these frauds, the worse it will be for everyone.

SheepDog-One's picture

Canker on America!

Drag Racer's picture

as the news hits...

BAC +0.04 +0.28%