Lender Flagstar Bancorp (FBC) faces above average risk when it comes to the potential for put-back exposures on reps and warrants claims filed by Fannie Mae and Freddie Mac, analysts say.
Analysis from Compass Point Research & Trade Group concluded that agency loans originated by Flagstar are 28% more likely to go delinquent than the average industry loan.
Combining this factor with other GSE statistics prompted Compass Point to conclude that FBC may incur reps and warrants losses of 1.79% of total unpaid principal balance sold, which is much higher than the average industry loss rate of 1.29%.
But Compass Point Research & Trade Group surmises that the lender, which already settled MBS claims with private insurer Assured Guaranty (AGO) earlier in the year, is ready to settle with the government-sponsored enterprises to get all of this behind them.
The research firm points out that Flagstar's CEO already indicated the firm is in settlement talks with Fannie Mae. Furthermore, Ed DeMarco, acting director of the Federal Housing Finance Agency, has suggested the GSEs want to have all legacy reps and warrants claims finalized by the end of 2013, making it very likely a Flagstar put-back deal is coming with Fannie Mae.
Compass Point estimates Flagstar has already charged-off or reserved losses equal to 0.86% of unpaid principal balance sold between 2005 and 2009.
"If FBC were to incur losses equal to the industry average, the company would need to put up an additional $395 million of reserves, or $6.98 per share. Considering the claims activity in the most recent quarters, we would expect the ultimate tally for GSE rep/warrants losses to come in lower the $395 million and currently assume FBC will need to take a $150 million charge in our valuation framework," Compass Point said.
Overall, Flagstar beat market forecasts after reporting reserve releases on the bank’s loan portfolio and reps and warrants provisions.
Flagstar reported a $4 million provision for reps and warrants in the third quarter, a significant drop from $29 million last quarter. Consequently, total reserves now stand at $174 million.
In June, Flagstar and Assured Guaranty entered into a settlement for alleged breaches of reps and warrants tied to RMBS that Assured Guaranty insured.
Flagstar’s willingness to get these putback issues behind them is evident in the $110 million settlement deal the bank struck with bond insurer MBIA. MBIA accepted the settlement with Flagstar over loans it guaranteed that later soured.