While the housing recovery appears to be a tailwind for financials, a major risk could await them, Tilden Park CIO Josh Birnbaum said Wednesday on CNBC.
"I think it's a mixed bag because housing is clearly going to be a tailwind for these banks," he said. "But on the reverse side, you have very compressed rate margins in this environment, and not to mention the fact the question that many people ask is, 'Do these bank have adequate reserves for the ongoing litigation that came out of the credit crisis?'"
(Read More: Is Worst Over for Europe's Banks?)
Birnbaum — whose hedge fund was the top performer for 2012, posting a return of 41 percent — formerly worked at Goldman Sachs and was responsible for the investment bank's winning $3.7 billion bet against the subprime housing market.
On "Fast Money," he cited a recent example of how the legal fallout of the housing crisis could hurt banks.
"The MBIA settlement is an example where Bank of America had reserved a certain amount," he said. "It ended up actually being a larger settlement, slightly larger, not a disaster for Bank of America. But the question many people are asking is, 'What is the scale of this?' and, 'How long will this go on? How long will this be an overhang for these financial equities?'"
Birnbaum said that the financial sector's legal bill would continue to be a factor in stock prices.
(Read More: 'Dr. Doom' Sees Crash in Stock 'Bubble')
"Being deep in the mortgage space, this is something that we look at all the time, particularly as it relates to the valuation of these debt instruments," he added. "Much of the valuation can be attributed to ongoing litigation."
(Read More: Congressional Testimony 'Slowed Us': Birnbaum)
Trader disclosure: On May 8, 2013, the following stocks and commodities mentioned or intended to be mentioned on CNBC's "Fast Money" were owned by the "Fast Money" traders: Jon Najarian is long JPM; Jon Najarian is long MSFT; Jon Najarian is long CLF; Jon Najarian is long NUE; Jon Najarian is long OC; Jon Najarian is long XLY; Jon Najarian is long UVXY;
For Colin Gillis
Investment banking (next 3 months): BGC Financial LP and/or its affiliates, expect to receive, or intend to seek, compensation for investment banking services within the next three months from all of the companies referenced within this report; Lead or Co-manager: BGC Financial LP and/or its affiliates, has not acted as lead or co-manager in a public offering of equity and/or debt securities for Microsoft within the last 12 months. BGC Financial LP and/or its affiliates has not received compensation for investment banking services in the last 12 months from Microsoft; Lead or Co-manager: BGC Financial LP and/or its affiliates, has not acted as lead or co-manager in a public offering of equity and/or debt securities for Yahoo within the last 12 months. BGC Financial LP and/or its affiliates has not received compensation for investment banking services in the last 12 months from Yahoo.