Banks’ buyback pain to be $17bn – $42bn, Fitch estimates | FT Alphaville

Banks’ buyback pain to be $17bn – $42bn, Fitch estimates

While the Firm uses the best information available to it in estimating its repurchase liability, the estimation process is inherently uncertain and requires the application of judgment.

– JP Morgan’s Q2 10-Q filing.

In Citi’s experience to date, as stated above, the request for loan documentation packages is an early indicator of a potential claim. During 2009, loan documentation package requests and the level of outstanding claims increased. In addition, Citi’s loss severity estimates increased during 2009 due to the impact of macroeconomic factors and its experience with actual losses at such time.

– Citi’s Q2 10-Q filing

Although this expense and related reserve are based on a life and loan calculation, the environment around repurchases continues to evolve and we will assess this reserve based on the facts available to us each quarter.

– Bank of America’s Q2 conference call.

Second quarter origination revenue was reduced by a $382 million addition to the mortgage loan repurchase reserve compared with a $402 million addition in first quarter.

– Wells Fargo Q2 press release.

Uncertain. Increasing. Evolving. Reducing.

Good choice of words, US banks.

And ones that also fit in with a just-released Fitch report on the impact of mortgage repurchases on the four US banks. The rating agency is undertaking a special review to assess the potential impact of repurchases — in which mostly US Government-Sponsored Enterprises (GSEs) force banks to buyback misrepresented mortgages — in light of a growing trend.

And, as of now, Fitch estimates the four banks’ buyback pain could be $17bn – $42bn:

–Under a mild loss scenario, where the GSEs collectively and successfully put back 25% of the current outstanding inventory of seriously delinquent loans, and assuming recovery rates of 60%, Fitch believes the expected loss for the four largest banks could be about $17 billion.

–Using a more moderate loss scenario, whereby the put-back rate goes to 35% and recovery rate drops to 55%, Fitch believes losses could come in around $27 billion.

–Finally, under a more adverse but less likely scenario, if repurchase requests were to run at 50% of delinquent loans, and recovery rates fall to 50%, then losses are about $42 billion.

These figures do not incorporate the ability to cure deficiencies in loans, thus ultimate realized losses could be lower than these figures. To put these figures in perspective, these institutions had annualized pre-provision net revenues and net income of $164 billion and $54 billion, respectively, in aggregate and $391 billion of tangible common equity.

So that’s not a threat to survival, but certainly a big drag on future earnings.

Did we mention that the Federal Reserve wants a piece of the repurchase action too?

Related links:
Banks face fight over mortgage-loan buybacks – WSJ
The $11.1bn buyback pain at BAC – FT Alphaville
A different kind of bank repurchase – FT Alphaville