The nation’s mortgage giants remain bogged down in claims arising from reckless lending during the housing bubble.
In the first quarter, Bank of America (BAC) recorded its lowest provision for repurchases of bad mortgages in more than three years, but most claims from private investors are still unresolved. JPMorgan Chase (JPM) has reduced its buyback reserve for seven consecutive quarters while Wells Fargo (WFC) has been building its up over the same period — a comparison that either makes JPMorgan Chase look aggressive or Wells Fargo conservative. (Repurchase data for the country’s three biggest mortgage lenders is shown in the following graphic. Interactive controls are described in the captions. Text continues below.)
The problem is that banks cannot quantify the ultimate costs they face from claims from private investors because they contest them and there is a scant track record to go on: myriad disputes are slowly working their way through the legal system.
The $250 million expense B of A recognized in the first quarter to absorb losses from loans it had previously sold to investors — generally because of things like misrepresentations about a borrower’s income or fraudulent appraisals — was a sharp drop from $3 billion in the fourth quarter. The fourth-quarter amount was driven by a settlement with Fannie Mae that covered the vast majority of B of A’s direct exposure to the government-sponsored entity.
Repurchase reserves work like loan-loss reserves: banks record costs that flow into an account they believe represents their total liability, and that account is depleted by chargeoffs as losses are realized.
B of A’s repurchase numbers have been lumpy because of settlements like the one with Fannie that have subsequently appeared to be false dawns as different liabilities came to light. Previous settlements include a similar deal with Freddie Mac in late 2010, a separate agreement at the same time that cleared out a backlog of demands from Fannie, and a deal with private-sector investors in June 2011 that explained most of B of A’s $14 billion repurchase expense that quarter.
B of A estimates that its repurchase liability, beyond amounts reflected in its financial statements, could be as much as $4 billion. But the assumptions behind that figure are unstable, hinging on unpredictable court decisions over matters like whether a default must be traced to faulty underwriting (as opposed to the bad economy) for a buyback claim to be valid. Recent rulings on this issue have been unfavorable for banks.
B of A’s estimates could be scrambled if the 2011 deal with private investors — known as the Bank of New York Mellon (BK) settlement for the trustee of the mortgage-backed bonds involved — falls apart. An important hearing on that case is scheduled to begin in late May, and objections from bondholders could sink the agreement, though several large investors that had previously opposed it have bowed out of the litigation.
Moreover, the repurchase figures do not encompass a passel of securities and other litigation that, in substance, is motivated by the same cause — the sale of trillions of dollars of dodgy mortgage assets. Notably, the Federal Housing Finance Agency, as conservator for Fannie and Freddie, has sued B of A and JPMorgan Chase, along with other issuers, for misrepresentations about the riskiness of mortgage bonds the GSEs bought.
B of A, which has the greatest exposure to bubble-era liabilities, has recognized about $27 billion of mortgage buyback expenses since 2010. JPMorgan Chase and Wells Fargo have each recognized about $5 billion. From 2010 to 2012, B of A recognized $12.4 billion of litigation expenses, and JPMorgan Chase $17.3 billion. Wells Fargo does not disclose its litigation expenses separately.
When asked why B of A’s stock sold off after its earnings release Wednesday morning (it closed down 4.7% that day), Chief Financial Officer Bruce Thompson said one reason was that analysts, looking at operating results, had not factored into their estimates about $900 million of litigation costs recognized during the period.
It seems reasonably likely analysts and investors will be disappointed again.