Fannie Mae and Freddie Mac continue to issue mortgage repurchase requests to major banks while regional banks are beginning to fear the pinch of those requests, Fitch Ratings said.
Fitch sees no sign of repurchase claims ending in the near future and says there's potential for midtier financial firms and large regional banks to feel earnings pressure if material repurchase claims strike them in the near future.
A rise in repurchase claims at the regional banks would set a new precedent since the majority of originators facing repurchase claims today are big banks such as Bank of America (BAC), JPMorgan (JPM), Citigroup (C), Wells Fargo (WFC) and Ally Financial.
"Outstanding repurchase claims at those five institutions stood at $24.7 billion as of March 31 — up almost 20% over first-quarter 2011," Fitch said. "Among the top five banks, Bank of America faces the largest amount in outstanding claims, representing about 60% of the total for all of the large originators. However, the outstanding claims total at Bank of America has been inflated by the ongoing dispute between the bank and Fannie Mae over the scope of claims related to breaches of representations and warranties on defaulted loans."
Even though regional banks could face costs from litigation and repurchase claims on private label mortgage-backed securities issuances, Fitch says those costs should be "significantly smaller" than what the big banks potentially face.
"In light of this fact, and because future GSE claims still appear unlikely to impair capital positions materially, we do not expect the level of repurchase claims, viewed in isolation, to have a large impact on U.S. bank ratings," the ratings agency said. "Still, unexpectedly large claims-related reserve increases in second-quarter 2012 results or later in the year could represent negative factors with the potential to affect future bank ratings."