Foreclosure-process errors that lead to putbacks of questionable home loans could cost the banking industry up to $120 billion, according to a note J.P. Morgan sent to clients late Friday.
Putback losses — which arise when investors in a mortgage-backed security demand that the banks that issued the security buy it back at par — are more likely to cost the industry in the neighborhood of $55 billion over a period of years, the note states. But the size of the losses will depend partly on the mix of loans that are returned to the banks, and under some scenarios, the figure could be more than twice that base estimate.
In its 43-page report, authored by a team of analysts in J.P. Morgan’s fixed-income strategy group, the bank argues that “many of the mortgage foreclosure problems highlighted in the past few weeks are process oriented and can be fixed in the near term.”
Those problems include the moratorium J.P. Morgan and other banks have placed on the foreclosure process and concerns about “robo-signing,” where foreclosures are completed without the required review of documentation.
Still, the analysts argue the putback risk is a potentially serious problem, the scope of which will depend on how many government-sponsored loans are returned to banks. Investors so far have been successful in putting back GSE, or agency, backed mortgages 40% of the time, whereas they’ve only succeeded at putting back private-label mortgages 20% of the time in most cases. But the latter loans could prove far more expensive for banks to buy back.
J.P. Morgan, Bank of America , and Ally Financial, the former GMAC, have been under increased scrutiny in recent weeks, as investors worry about the financial impact of the robo-signing crisis and related issues. Liability estimates have varied widely.
Interestingly, a Morgan Stanley report released this morning makes exactly the same base-case estimate as J.P. Morgan: $55 billion. “This is not 2008,” the report declares.
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