While the ultimate size of the toll from mortgage repurchases remains
Estimates used by analysts and the companies themselves to set aside reserves involve assumptions about the flow of loans at various stages before final loss: from origination to default to putback to unrecoverable value.
The total exposure is greatest at Bank of America Corp., which has reported that it (including businesses like Countrywide Financial Corp. that it acquired) sold more than $1.2 trillion of mortgages to the government-sponsored enterprises between 2004 and 2008, years that have been the source of the most trouble. It also sold $750 billion of mortgages to private investors or through the issuance of nonagency bonds during the same time, excluding $160 billion that were covered by private insurers (who have also forced repurchases) and $110 billion sold by Merrill Lynch & Co.
Wells Fargo & Co. has said that it serviced about $144 billion of mortgages that back private-label securities at Sept. 30, leaving about $1.3 trillion of mortgages it services for others, primarily Fannie Mae and Freddie Mac. (The current size of a servicing portfolio understates a company's full exposure since it does not capture loans that have already defaulted and left the pool but can still lead to a repurchase claim.)
JPMorgan Chase & Co. has provided the most extensive disclosures: in the GSE universe, about 12% of $383 billion of loans sold from 2005 to 2008 were ever late by more than 90 days through Sept. 30; about 15%, or $7.2 billion, of these have generated repurchase demands; about half of the resolved demands were met with repurchases (the GSEs retract some claims upon appeal and about $1 billion of the claims were still outstanding); and the lender realized losses of about 50% on the repurchases.
Servicers can and do shunt some of the repurchase burden to correspondents that originated loans they resold. JPMorgan Chase said about 40% of the mortgages it has been asked to buy back came from third parties. But this layer of the food chain has suffered many casualties and many survivors have limited resources. Wells Fargo said it initially bought about 20% of the loans it has been asked to repurchase from correspondents, and it typically recovers about half the losses from them.
Loans continue to go bad and repurchase demands continue to roll in, but, despite numerous holes in the available information, the reported figures are roughly in the range of assumptions that analysts have used to project lifetime industry losses of around $50 billion to $80 billion.
Still, while lenders maintain they have a handle on putbacks from Fannie and Freddie after years of absorbing them, the impact can be lumpy.
JPMorgan Chase has forecast that realized losses next year will be about the same as this year, and, encouraged that new delinquencies from mortgages originated in the worst years were tailing off, said that it could be done building its loss cushion.
But notwithstanding improvements in delinquencies, requests to JPMorgan Chase to review loan files — a step that precedes a repurchase demand — spiked this year through September. The reviews have encompassed loans originated back through the middle of the decade, and the increased tempo was the primary factor behind the company's decision to increase its reserve by $1 billion in the third quarter.
Meanwhile, the dimensions of the repurchases that could emanate from private investors remain shrouded in uncertainty. Lenders argue that legal hurdles to such putbacks are much higher than for agency loans, but, citing scant history with them so far, they say it is generally impossible to make reasonable estimates and thus set aside matching reserves.
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