Bank of America Corp and JPMorgan Chase & Co are among 11 lenders that could suffer US$133.8 billion in combined losses as mortgage-bond investors and insurers demand refunds for soured loans, according to an analysis by Compass Point Research and Trading LLC.
That’s the base estimate by analyst Chris Gamaitoni, who told clients costs may range from US$55.3 billion in a best-case scenario to US$179.2 billion at worst. The losses would be in addition to US$28 billion of buyback demands by Fannie Mae and Freddie Mac that Compass previously predicted.
Deutsche Bank AG and Goldman Sachs Group Inc are among lenders confronting the biggest potential impact, according to Gamaitoni’s report.
Lenders have been barraged by claims from mortgage buyers and insurers who say banks sold housing debt to investors based on untrue or misleading data about home loans. The estimated losses exceed 10 percent of tangible book value at eight of the banks Gamaitoni cited. While solvency isn’t at risk, the drain on profit could last for years, he said.
“The investor community overall doesn’t understand the magnitude of the problem,” Gamaitoni said in a telephone interview.
Gamaitoni was a senior financial analyst at Fannie Mae before joining Compass Point, a Washington-based research and investment banking firm founded in 2007 by former executives of Friedman Billings Ramsey & Co.
Bond insurers including MBIA Inc and investors including three of the government-chartered Federal Home Loan Banks have sued securities underwriters and issuers, citing inaccurate claims over property values and quality of underlying assets. Fannie Mae and Freddie Mac collapsed into US conservatorship, while MBIA saw its stock price slide more than 80 percent as losses mounted.
Bank of America, which acquired Countrywide Financial Corp in 2008, faces a US$35.2 billion loss under Compass Point’s base-case scenario, or 17 percent of tangible book value.
JPMorgan Chase, which acquired Bear Stearns Cos and Washington Mutual Inc, may lose US$23.9 billion, or 13 percent of book value, while Deutsche Bank may lose US$14.1 billion, or 21 percent of book value, the report said.
Goldman Sachs may face an US$11.2 billion hit equal to 11 percent of book value, the report said.
“It’s not going to cause any solvency issues because the banks have other earnings, and it’s going to happen over time,” Gamaitoni said, estimating most of the losses would be recorded over the next three years. “It’s going to be more like a slow bleed.”
The banks, which underwrote securities made up of mortgage loans, face years of legal disputes because they are “the ones left standing” after the failure of hundreds of subprime lenders who dealt directly with home buyers, Gamaitoni said.
Fitch Ratings, in a separate report on Wednesday, said the four biggest US banks may have combined losses of US$17 billion to US$42 billion due to repurchase requests from Fannie Mae and Freddie Mac.
More aggressive demands from the two companies subject Bank of America, JPMorgan, Citigroup Inc and Wells Fargo & Co to “losses that have not been previously incorporated into Fitch’s existing exposures and effectively into current ratings,” the report said.
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