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Banks Swallow Another $30 billion or So in More Losses as Their Share Prices Surge (Again)
Two months ago I pointed out an anomaly in JP Morgan's
"blowout" quarterly earnings release - Reggie Middleton on JP Morgan's
"Blowout" Q4-09 Results. Let's reminisce...
Warranties of representation, and forced repurchase of
loansJP Morgan has increased its reserves with
regards to repurchase of sold securities but the information surround
these actions are very limited as the company does not separately
report the repurchase reserves created to meet contingencies. However,
the Company's income from mortgage servicing was severely impacted by
increase in repurchase reserves. Mortgage production revenue was
negative $192 million against negative $70 million in 3Q09 and positive
$62 million in 4Q08.Counterparties who are
accruing losses from bad loans, (ex. monoline insurers such as Ambac
and MBIA, see A Super Scary Halloween Tale of 104
Basis Points Pt I & II, by Reggie Middleton circa November
2007,) are stepping up their aggression in pushing loans that
appear to breach certain warranties or smack of fraud. I expect this
activity to pick up significantly, and those banks that made
significant use of brokers and third parties to place mortgages will be
at material risk - much more so than the primarily direct writers.
I'll give you two guesses at which two banks are suspect. If you need a
hint, take a look at who is increasing reserves for repurchases! JP
Morgan and their not so profitable acquisition, WaMu!
As I said, losses should be ramping up on the mortgage sector.
Notice the trend of housing prices after the onset of government bubble
blowing: If Anybody Bothered to Take a Close
Look at the Latest Housing Numbers...PNC Bank and
Wells Fargo are in very similar situations regarding acquiring stinky
loan portfolios. I suggest subscribers review the latest forensic
reports on each company to refresh as the companies report Q4 2009
earnings. Unlike JPM, these banks do not have the investment banking
and trading fees of significance (albeit decreasing significance) to
fall back on as a cushion to consumer and mortgage credit losses.
Well, it looks as if I was onto
something. From Bloomberg:
something. From Bloomberg:
March 5 (Bloomberg) -- Fannie Mae andFreddie Mac may force lenders
includingBank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. to buy back $21 billion of home
loans this year as part of a crackdown on faulty mortgages.That’s
the estimate of Oppenheimer & Co. analyst Chris Kotowski, who says U.S. banks
could suffer losses of $7 billion this year when those loans are
returned and get marked down to their true value. Fannie Mae and
Freddie Mac, both controlled by the U.S. government, stuck the four biggest U.S. banks with losses
of about $5 billion on buybacks in 2009, according to company filings
made in the past two weeks.
The surge shows lenders
are still paying the price for lax standards three years after
mortgage markets collapsed under record defaults. Fannie Mae and
Freddie Mac are looking for more faulty loans to return after suffering
$202 billion of losses since 2007, and banks may have to go along,
since the two U.S.- owned firms now buy at least 70 percent of new
mortgages.
...
Freddie Mac
forced lenders to buy back $4.1 billion of mortgages last year, almost
triple the amount in 2008, according to a Feb. 26 filing. As of Dec. 31,
Freddie Mac had another $4 billion outstanding loan-purchase demands
that lenders hadn’t met, according to the filing. Fannie Mae didn’t
disclose the amount of its loan-repurchase demands. Both firms were
seized by the government in 2008 to stave off their collapse.
....
The government’s efforts might be
counterproductive, since the Treasury and Federal Reserve are trying to
help banks heal, FBR’s Miller said. The banks have to buy back the
loans at par, and then take an impairment, because borrowers usually
have stopped paying and the price of the underlying homehas plunged.
JPMorgan said in a presentation last month that it loses about 50 cents
on the dollar for every loan it has to buy back.
Striking a Balance
“It’s a fine
line you’re walking, because the government’s trying to recapitalize
the banks, not put them in bankruptcy, and then here’s Fannie and
Freddie putting more pressure on the banks through these buybacks,”
FBR’s Miller said. “If it becomes too big of an issue, the banks are
going to complain to Congress, and they’re going to stop it.” [Of,
course! Let the taxpayer eat the losses borne from our purposefully
sloppy underwriting]
Bank
of America recorded a $1.9 billion “warranties expense” for past and
future buybacks of loans that weren’t properly written, seven times the
2008 amount, the bank said in a Feb. 26 filing.
A spokesman for Charlotte, North Carolina- based Bank of America, Scott Silvestri, declined to
comment.
JPMorgan, based in New York,
recorded $1.6 billion of costs in 2009 from repurchases, including $500
million of losses on repurchased loans and $1 billion to increase
reserves for future losses, according to a Feb. 24 filing.
“It’s become a very meaningful issue, and it
will continue to be a meaningful issue for the next couple of years,” Charlie Scharf,
JPMorgan’s head of retail banking, said at a Feb. 26 investor
conference. He declined to say when the repurchase demands might peak.
...
“I can’t forecast the rates
at which they’re going to continue,” she said. Her division
lost $3.84 billion last year, as the bank overall posted a $6.28
billion profit. “The volume is increasing.”
Wells
Fargo, ranked No. 1 among U.S. home lenders last year, bought back
$1.3 billion of loans in 2009, triple the year-earlier amount,
according to a Feb. 26 filing.
The San Francisco-based bank recorded $927 million of costs last year
associated with repurchases and estimated future losses.
...
Citigroup increased its repurchase
reserve sixfold to $482 million, because of increased “trends in
requests by investors for loan-documentation packages to be reviewed,”
according to a Feb. 26 filing.
“The request for loan documentation packages is an
early indicator of a potential claim,” New York-based Citigroup said.
...
Banks that sell mortgages to
Fannie Mae and Freddie Mac have to provide “representations and
warranties” assuring that the loans conformed to the agencies’
standards. With more loans going bad, the agencies are demanding that
banks turn over loan files, so they can scour the records for missing
documentation, inaccurate data and fraud.
...
The most common include inflated appraisals or falsely stated
incomes in the loan applications, said Larry Platt, a Washington-based
partner at law firm K&L Gates LLP who specializes in
mortgage-purchase agreements. The government agencies hire their own
reviewers who go back and compare the appraisals with prices from
historical home sales, he said.
“They may do a
drive-by for a visual inspection,” he said.
Wells
Fargo said three-fourths of its repurchase requests came from Freddie
Mac and Fannie Mae. While investors may demand repurchase at any time,
most demands occur within three years of the loan date, Wells Fargo
said.
The mortgage firms are looking at every
loan more than 90 days past due and “asking us basically to give them
all the documentation to show that it was properly underwritten,”
JPMorgan’s Scharf said. “We then go through a process with them that
takes a period of time, and literally it’s every loan, loan-by-loan,
and have the discussion on whether or not we actually should buy the
loan back.”
...
Mortgage
repurchases may crimp bank earnings through 2011, Oppenheimer’s
Kotowski said. That’s because the worst mortgages -- those underwritten
in 2007 -- are just now coming under the heaviest scrutiny, he said.
...
“The worst of the stress is
the 2007 vintages, though 2006 and 2005 weren’t a whole lot better and
2008 wasn’t much better,” Kotowski said.
Next
week, the Mortgage Bankers Association is holding a workshop in the
Dallas area that promises to help banks “survive the buyback deluge”
and “build up your repertoire of lender defenses.” According to the
MBA’s Web site, the workshop is sold out.
That’s the estimate of Oppenheimer & Co.
analyst Chris Kotowski, who says U.S. banks
could suffer losses of $7 billion this year when those loans are
returned and get marked down to their true value. Fannie Mae and
Freddie Mac, both controlled by the U.S. government, stuck the four biggest U.S. banks with losses
of about $5 billion on buybacks in 2009, according to company filings
made in the past two weeks.
The surge shows lenders
are still paying the price for lax standards three years after
mortgage markets collapsed under record defaults. Fannie Mae and
Freddie Mac are looking for more faulty loans to return after suffering
$202 billion of losses since 2007, and banks may have to go along,
since the two U.S.- owned firms now buy at least 70 percent of new
mortgages.
...
Freddie Mac
forced lenders to buy back $4.1 billion of mortgages last year, almost
triple the amount in 2008, according to a Feb. 26 filing. As of Dec. 31,
Freddie Mac had another $4 billion outstanding loan-purchase demands
that lenders hadn’t met, according to the filing. Fannie Mae didn’t
disclose the amount of its loan-repurchase demands. Both firms were
seized by the government in 2008 to stave off their collapse.
....
The government’s efforts might be
counterproductive, since the Treasury and Federal Reserve are trying to
help banks heal, FBR’s Miller said. The banks have to buy back the
loans at par, and then take an impairment, because borrowers usually
have stopped paying and the price of the underlying homehas plunged. JPMorgan
said in a presentation last month that it loses about 50 cents on the
dollar for every loan it has to buy back.
Striking a Balance
“It’s a fine line you’re
walking, because the government’s trying to recapitalize the banks, not
put them in bankruptcy, and then here’s Fannie and Freddie putting
more pressure on the banks through these buybacks,” FBR’s Miller said.
“If it becomes too big of an issue, the banks are going to complain to
Congress, and they’re going to stop it.” [Of,
course! Let the taxpayer eat the losses borne from our purposefully
sloppy underwriting]
Bank
of America recorded a $1.9 billion “warranties expense” for past and
future buybacks of loans that weren’t properly written, seven times the
2008 amount, the bank said in a Feb. 26 filing. A
spokesman for Charlotte, North Carolina- based Bank of America, Scott Silvestri, declined to
comment.
JPMorgan, based in New York,
recorded $1.6 billion of costs in 2009 from repurchases, including $500
million of losses on repurchased loans and $1 billion to increase
reserves for future losses, according to a Feb. 24 filing.
“It’s become a very meaningful issue, and it
will continue to be a meaningful issue for the next couple of years,” Charlie Scharf,
JPMorgan’s head of retail banking, said at a Feb. 26 investor
conference. He declined to say when the repurchase demands might peak.
...
“I can’t forecast the rates
at which they’re going to continue,” she said. Her
division lost $3.84 billion last year, as the bank overall posted a
$6.28 billion profit. “The volume is increasing.”
Wells Fargo, ranked No. 1 among U.S. home lenders last
year, bought back $1.3 billion of loans in 2009, triple the
year-earlier amount, according to a Feb. 26 filing.
The San Francisco-based bank recorded $927 million of costs last year
associated with repurchases and estimated future losses.
...
Citigroup increased its repurchase
reserve sixfold to $482 million, because of increased “trends in
requests by investors for loan-documentation packages to be reviewed,”
according to a Feb. 26 filing.
“The request for loan documentation packages is an
early indicator of a potential claim,” New York-based Citigroup said.
...
Banks that sell mortgages to
Fannie Mae and Freddie Mac have to provide “representations and
warranties” assuring that the loans conformed to the agencies’
standards. With more loans going bad, the agencies are demanding that
banks turn over loan files, so they can scour the records for missing
documentation, inaccurate data and fraud.
...
The most common include inflated appraisals or falsely stated
incomes in the loan applications, said Larry Platt, a Washington-based
partner at law firm K&L Gates LLP who specializes in
mortgage-purchase agreements. The government agencies hire their own
reviewers who go back and compare the appraisals with prices from
historical home sales, he said.
“They may do a
drive-by for a visual inspection,” he said.
Wells
Fargo said three-fourths of its repurchase requests came from Freddie
Mac and Fannie Mae. While investors may demand repurchase at any time,
most demands occur within three years of the loan date, Wells Fargo
said.
The mortgage firms are looking at every
loan more than 90 days past due and “asking us basically to give them
all the documentation to show that it was properly underwritten,”
JPMorgan’s Scharf said. “We then go through a process with them that
takes a period of time, and literally it’s every loan, loan-by-loan,
and have the discussion on whether or not we actually should buy the
loan back.”
...
Mortgage
repurchases may crimp bank earnings through 2011, Oppenheimer’s
Kotowski said. That’s because the worst mortgages -- those underwritten
in 2007 -- are just now coming under the heaviest scrutiny, he said.
...
“The worst of the stress is
the 2007 vintages, though 2006 and 2005 weren’t a whole lot better and
2008 wasn’t much better,” Kotowski said.
Next
week, the Mortgage Bankers Association is holding a workshop in the
Dallas area that promises to help banks “survive the buyback deluge”
and “build up your repertoire of lender defenses.” According to the
MBA’s Web site, the workshop is sold out.
For all of you JP Morgan fans out there, this was
always a very popular piece, An Independent Look into JP Morgan :
always a very popular piece, An Independent Look into JP Morgan :
The JP Morgan forensic preview is now
available. Remember, this is not subscription material, but a "public
preview" of the material to come. I thought non-subscribers would be
interested in knowing what my opinion of the country's most respected
bank was. There is some interesting stuff here, and the subscription
analysis will have even more (in terms of data, analysis and
valuation). As we have all been aware, the markets have been totally
ignoring valuation for about two quarters now. It remains to be seen
how long that continues.Click graph to enlarge
Cute graphic
above, eh? There is plenty of this in the public preview. When
considering the staggering level of derivatives employed by JPM, it is
frightening to even consider the fact that the quality of JPM's
derivative exposure is even worse than Bear Stearns and Lehman‘s
derivative portfolio just prior to their fall. Total net
derivative exposure rated below BBB and below for JP Morgan currently
stands at 35.4% while the same stood at 17.0% for Bear Stearns
(February 2008) and 9.2% for Lehman (May 2008). We all know what
happened to Bear Stearns and Lehman Brothers, don't we??? I warned all
about Bear Stearns (Is this the Breaking of the Bear?:
On Sunday, 27 January 2008) and Lehman ("Is Lehman really a lemming in disguise?":
On February 20th, 2008) months before their collapse by taking a
close, unbiased look at their balance sheet. Both of these companies
were rated investment grade at the time, just like "you know who".
Now, I am not saying JPM is about to collapse, since it is one of the
anointed ones chosen by the government and guaranteed not to fail -
unlike Bear Stearns and Lehman Brothers, and it is (after all)
investment grade rated. Who would you put your faith in, the big
ratings agencies or your favorite blogger? Then again, if it acts like a
duck, walks like a duck, and quacks like a duck, is it a chicken???
I'll leave the rest up for my readers to decide.This public
preview is the culmination of several investigative posts that I have
made that have led me to look more closely into the big money center
banks. It all started with a hunch that JPM wasn't marking their WaMu
portfolio acquisition accurately to market prices (see Is JP Morgan Taking Realistic Marks on
its WaMu Portfolio Purchase? Doubtful! ), which would very well
have rendered them insolvent - particularly if that was the practice
for the balance of their portfolio as well (see Re: JP Morgan, when I say insolvent, I
really mean insolvent). I then posted the following series, which
eventually led to me finally breaking down and performing a full
forensic analysis of JP Morgan, instead of piece-mealing it with
anecdotal analysis.
- The Fed Believes Secrecy is in Our Best
Interests. Here are Some of the Secrets- Why Doesn't the Media Take a Truly
Independent, Unbiased Look at the Big Banks in the US?- As the markets climb on top of one big,
incestuous pool of concentrated risk...- Any objective review shows that the big
banks are simply too big for the safety of this country- Why hasn't anybody questioned those
rosy stress test results now that the facts have played out?You can download the public preview here. If you find it to be of
interest or insightful, feel free to distribute it (intact) as you
wish.
JPM Public Excerpt of Forensic Analysis Subscription
2009-09-18 00:56:22 488.64 Kb
- advertisements -
A large number of people "in the know" absolutely sure that the "sale" of Bear Sterns was not to preserve Bear, but to SAVE JP Morgan/Chase. That's why they didn't think twice before letting much bigger Lehman go under: it posed no threat to the Fed's darling JPM.
The question I have is this: The Fed will do anything and everything possible to save JPM. What kind of "secrets" does JPM know? Is it just sheer size of JPM, or there's something else? ZeroHedge already noted "suspicious" SPY purchases in after-market by JPM, others are talkign about JPM-facilitated swaps that preserve value of the USD and keep UST bond rates low. And, let's not forget, Dimon sits on the NY Fed Board. But so did Fuld!
So, what is it that makes JPM such an important firm in th e eyes of the Fed Fed?
Reggie --
You are really showing your true colors here (and thats bad analysis).
1) Agree with first poster, the write-downs from Fannie/Freddie put-backs are tiny in the big scheme of things and largely already accounted for. What are "revs" at the 5 banks listed? Wells alone did $88B/revs last year. Lots of loan-loss reserves. Another $1B in write-downs is not some giant scary number that you try to make it out to be.
2) Are you really thinking SHORT banks here? Thats ludicrious. All the info show the credit losses have topped. Cycle is turning. IF losses drop even with medium recovery speed banks could be a double. Loss reserves are high. Curve is steep. Competition has been decimated. In a mild continuation of the recovery banks are a double. You'd be an idiot to short that.
3) Isnt Q1 2010 BETTER than Q4 2009? I mean... we've been getting better for 4 straight Qs. Expectations were for armageddon in Q1 2009. It didnt happen. Defaults have been FAR lower than expected. Recoveries FAR better. Some notable HY levered credit bonds are UP from 10 pts to 90 pts + coupon. Thats 1000% return. (Were you short?). We see more buyouts and M&A each week.
Doesnt that continue?
Dont house prices continue to stabilize?
Dont banks post a better than expected Q1? Start the drop in "credit loss write-offs"?
I have not idea what you are talkign about.
See my reply to the first poster. If they are already accounted for, why do they increase quarterly? In addition, how would you know if they were already accounted for without knowing what the future losses will be? Why are you comparing losses to revenues? Compare the losses to the profits, which makes the issues of put backs considerable more of an issue. You are also attempting to pigeon hole the put back and warranty losses to two entities when the reality of the situation is we are probably talking about thousands of entities, world wide.
Well, maybe you know something that I don't. FDIC data says losses are still increasing in Alt-A first and second lien, all classes of subprime, blowing up in commercial (nearly all classes), and mariginally worse in C&I. The prime losses are also still ramping higher. The NY Fed data shows the same thing. I am truly at a loss as to what data you have that contradicts all of this. The only positive trend that I see is that 30 day delinquincies have turned across the board, but 90 days and charge offs are growing steadily. The 30 days look much better, but when considering unemployment and the extreme capital that the government has put into supporting this market (which is now supposedely being withdrawn, we shall see about that) I would take a wait and see attitude for it appears that the govt. is driving any potential positives in this market and not the fundamentals or the macro outlook.
No!
That's because congress strong armed FASB to allow banks to say things were getting better regardless of whether they were getting better or not, and the raw loss data does not show anything getting better except for what I mentioned above.
Recoveries are getting worse, much worse. What data are you looking at? Housing prices have resumed their downward trend after a brief respite most likely stemming from the unsustainable government support that have been thrown at it. For the record, I wasn't expecting armeggedon, just a few insolvencies to be recognized that were not recognized. The insolvencies are still there though, recognized or not.
No, they are continuing to move down. See It's Official: The US Housing Downturn Has Resumed in Earnest and If Anybody Bothered to Take a Close Look at the Latest Housing Numbers...
No, but then again I guess the expectations depend on who you are referring to. Outside of trading and non-core banking businesses, most of the suspect banks performance cane out rather poorly.
Look at the data behind the reporting. For one, many banks reported increasing charge offs, and in addition all you have to do is modify your accounting to get a different result. Many banks have done this as well. Look at the raw data and you see losses are getting worse. If that's the case and you believe the banks are doing better, and the banks are the only ones that are giving these loans, then who is taking the losses my friend. It ain't Santa Claus.
Reggie --
Your response to my post continues your classic bad analysis:
1) My first post is about the "magnitude" of the losses. I make the point that in light of WFC's $88B in annual revs, the "put-backs" are just immaterial. You cite ZERO numbers in your reply -- nice.
Magnitude dude. Problems have magnitude. This one is low.
2) You think recoveries are worse today than Q1 2009? You have no hope. Mortgage ABX credit bonds are up from 30 to 60, from 50 to 90. Some HY credit bonds are up from 10 to 90.
How is that true if recoveries are less and defaults are worse?
Make some contacts with people who buy foreclosures. The guys I know in that space (one bought 250 properties in South Florida in the last 3 years)... say auction prices are about 2x what they were in the trough.
Why do "estimated FDIC losses" on bank failure keep getting better and better? Why was the number of bank failure in Feb the lowest in 1-yr, <50% of peak... and the est costs were the lowest in 18 months <10% of peak monthly loss costs?
But hey... stay short. Paulson, Tepper, Soros and main smart funds are now big holders of C, BAC, WFC, and regionals (best performers YTD). Same guys who were short in 2006.
Good luck.
-BBH
But you are comparing losses to revenues instead of losses to profits. Again, the wrong comparison. In addition, you are missing the magnitude argument. What you are considering small are just Fannie and Freddie. What about ALL of the other buyers of the mortgage products that will attempt to put bad loans back?
You are looking at derivatives and I am referring to the cash market. Housing prices are down, and trending lower. Foreclosure inventory is increasing, and organic supply is increasing at the same time.
That use to be a business of mine, hence I really know what I am talking about. Florida is not the market.
Better question, why do "actual" FDIC losses keep getting worse?
The FDIC is currently running a negative balance or close to it. They can't take over banks with money they don't have. the fact that they haven't taken over a bank doesn't mean its not on the brink. Talk to people in the banking industry inconfidence.
So, because the prices of their stocks went up, this is a sign that all is well with the banking industry??? And you are accusing one of bad analysis? Who were the best performers of 1999? Didn't a bunch of so-called smart funds hold them as well?
Reggie --
Man! Do some analysis.
WFC did $88B in revs last year. How much of that did they use in "credit write-downs" and "additions to loan-loss reserves"? Answer -- $40B! This is their biggest cost. Banks dont sell TVs where they have "revs", "cogs", and "profits". There COST is primarily credit losses. Duh! Thats why I reference "revs". Revs will continue to be high... reserve additions and writedown will decline big. The stocks are roughly a double to that event.
I cant help you Reggie.
Go back and look at your work where you were negative after Q1 2009 (BAC had an AWESOME Q).
Go back and look at what you missed in GGP.
You continue to mis-read the same issues.
-BBH
Thanks, good article but you've repeated the same thing twice, starting at "That’s the estimate of Oppenheimer & Co. analyst Chris Kotowski, "
Reggie - the numbers are in Trillions, not Billions. Check the graph, the footnote, and think again.
It's a typo.
$30b worth of FNM/FRE repurchases are a small number in the overall scheme of things. I don't think it'll materially affect the banks as much as you think, since they were previously writing down those amounts in their own originations (which they don't do as much originating as before).
As for the notional value of the derivatives book, I don't think this matters much either. If JPM defaults, then they just default. The writedowns would truly then come to the rest of the banks and that'd be a good thing overall for this economy. Everybody knows that JPM would never be able to honor even a fraction of their derivative trades, and possibly because it doesn't have to. It has open CDSs on US sovereign debt. Do you really believe that JPM could ever deliver on this? In fact, it'd be nearly impossible since there would be a collapse of the dollar if we defaulted on our debt. $1 trillion dollars wouldn't even be able to buy a house. If there was nuclear war or a 2012 (the movie) style disaster, JPM (and us all) would have bigger things to worry about at that point.
I know the numbers a big scary number, but there are similar numbers for the entire notional value of equity options on the SPY for example. With a few million contracts open in the front month, the notional value of calls/puts on the SPY is well over $250 billion. Of course 70-80% of those will expire worthless in a given month, and the rest will be significantly reduced to its intrinsic value. Net-net, the value of in-the-money options would be a fraction of the $250 billion of notional value at the beginning of the month. And even then, not all of the ITM options are exercised.
Mortgage production revenue was negative $192 million against negative $70 million in 3Q09 and positive $62 million in 4Q08. As you ca see, the writedowns are increasing, and increasing dramatically, thus you can't say they won't be affected because they have already provisioned for it. You are also missing the point. This is not about Fannie and Freddie, this is about all investors they have sold MBS and mortgages to as well as all insurers they have bought insurance from. The monolines are putting bad loans back to originators too. The admins of pools, CDO's etc. If the banks had to eat a 50% loss of all of the bad loans they have sold (which is at least a third of all of the loans sold from '05 to '08) then we are talking significant numbers. The loss rate on subprime mortgages is nearly 50% now