Open dialogue is crucial in any relationship. But that doesn't mean you always like what your partner has to say.
Such is the case with First Horizon National's talks with the government mortgage giant Fannie Mae. The Memphis, Tenn., bank said Monday it will take a $272 million second-quarter charge primarily for mortgage repurchases from Fannie Mae and Freddie Mac.
The increased reserve by First Horizon comes after PNC Financial Services Group said earlier this month that it plans to boost its repurchase reserves by $350 million in the second quarter.
In at least First Horizon's case, the reserve increase came about after the company held talks with Fannie Mae to better gauge its liability. Some analysts say the government-sponsored enterprises are sending a bold signal to banks — particularly those that are not among the top 10 largest servicers — to prepare for continued elevated buybacks and a major effort to resolve disputes this year.
"It seems clear the GSEs are taking steps to address the liability of the past," says Mike Turner, an analyst at Compass Point Research and Trading. First Horizon and PNC are ranked as the ninth and 10th-largest servicers, suggesting the largest servicers may be "further along in the process," in garnering information from the GSEs, he says. Paul Miller, managing director at FBR Capital Markets, wrote in a report last week that higher putbacks from Fannie and Freddie will lead to larger losses. "Our expectations of losses for the group have increased as the GSEs continue to pursue claims aggressively," Miller wrote. He also raised expectations for repurchase demands from investors holding private-label securities.
First Horizon's recent chat with Fannie Mae about mortgage repurchases went far beyond the conveyance of data. William "BJ" Losch 3rd, First Horizon's chief financial officer, said on a conference call with analysts that the meeting had gone a long way to explain which loans the GSE targets for putbacks. While the higher putback estimates would be costly, Losch said, "we want to get it right, and the sooner we can work through them, the better it is for everybody."
Still, First Horizon may be unique. It is unusual among large banks because in 2008 it sold off the servicing for most of $58 billion in loans it originated precrisis, meaning it has little ability to monitor the portfolio for a likelihood of putbacks. That prevented the bank from accurately estimating its total repurchase risk. Losch said he had badgered Fannie "for quite some time" to release the information.