Over the weekend, JPM's Ed Reardon shared the bank's first official takeaway on fraudclosure (yes, it refuses to go away). According to the bank "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." One wonders when the biggest bank in the world actually has come out with a less than rosy view on an event that could be a game changer: we are too lazy to go back in the archives to read JPM's take on subprime in early 2007 but we are confident it would have been summarizied in one word: "manageable." Yet even JPM is forced to acknowledge that putbacks are the biggest risk, as we highlighted yesterday via a confidential memorandum from Wells Fargo. To wit, from JPM: "We estimate putback risk to be approximately $23-$35bn for agency mortgages, $40-80bn in non-agency and roughly $20-30bn for second liens and HELOCs. However, there are a number of reasons why these estimates are on the high end, including losses already taken and loss reserves established. Specifically, putback losses could reach $55bn in our base case scenario, but, importantly, will be spread out over years owing to the complexity and cost of implementing putbacks, especially in non-agency securitizations. Consequently, the annual putback cost to the industry is likely to be in the range of $10-25 billion. There are several reasons for our lower putback success rate assumptions in the private-label market relative to the agencies, including creating a process to put loans back, and demonstrating not only that the loan breached a representation or warranty, but also that the breach affected the value of the loan." This is basically JPM's way of saying that QE2, instead of being a UST purchasing program, will actually be one where the Fed will buy a new batch of completely fraudulent MBS. This also jives with what Pimco is expecting, based on the firm's recent surge in MBS purchases on margin.
Full JPM presentation on fraudclosure putback risk.