Looking for a reason why the surge of BAC has been abruptly halted after hours? Look no further - as predicted earlier, when we commented on the periodic reincarnation of the always false global refi rumor which served among other things to push BAC higher by almost 10%, the rumor was found to be false... all over again. In other words no refi, no benefit to TBTF, and all of today's gains are based on what Bloomberg noted was a report issued yesterday by a Jaret Seiberg, who until recently was an employee of MF Global, and has since been acquired with his entire Washington Research Group by none other than Guggenheim partners, which just happens to be run by former Bear Stearns exec Alan Scwhartz. From Bloomberg, here is the official denial (which came literally seconds after market close):
- White House Has No Plan for Mass Home Refinancing, Person Says
Incidentally, even if the rumor was true, here is JMP explaining why it would have no real impact on Bank of America
Bank of America (BAC, $6.28, Market Perform): Market Overly Optimistic About the Impact of a Hypothetical $1 Tril. Refinance Program, in Our View
Shares of BAC were up 8% today as rumors swirled that President Obama may enact a $1 trillion refinance program. Granted, BAC shares were trading at a big discount to book (0.4x), and the investment community--now with several months of runway--seems to be going "risk on". But the big upward move on this news seems more a grasp for "validation", and we don't believe it will stick.
We must point out that BAC is up big, while JPM and Citi are only up with the broader bank index. This suggests that the market is focused on the mortgage-loss exposure specifically as this is uniquely troubling at BAC. Were the market focused on the big potential one-time benefits of mortgage production fees (in our view, the lone positive), they would all be up big, but this is not the case. Meanwhile, servicing revenue should obviously be a zero-sum game.
Thus, we focus our discussion on the loss exposure. The key risk to BAC is the looming threat of material mortgage putbacks (reps and warranties). These are not new losses but losses already locked in and incurred by others that are merely redistributed to BAC retroactively via the legal system. No refinance program will undo these losses for which, in most cases, the foreclosure has been completed.
As for the matter of avoiding new losses by saving currently wobbly homeowners, we question the efficiacy of a refinance program when the key issue is jobs--where the homeowner has no income nor liquid asset buffer, a lower payment isn't going to matter. More generally, as we have seen with prior attempts, these programs are more about kicking the can down the road, so it's more about delaying future losses than avoiding them altogether.
Many homeowners could already materially lower their payment (or avoid a looming balloon) via refinancing but can't do so because of the LTV. Thus, we presume any big refinance program would have to include the U.S. government providing mortgage insurance to the lenders/investors, which creates incremental risk for the U.S.
We will leave it to the political analysts to opine about whether or not President Obama can even get away with enacting a $1 trillion program that incurs large amounts of financial risk to the U.S. government. Our view is that, even if this comes to pass, the impact on BAC's putback risk is negligible, so the stock continues to deserve a steep discount and today's move is likely to prove fleeting.