KBW lowers mortgage repurchase risk at major banks to $33 billion
Investment bank Keefe, Bruyette & Woods revised its estimate of banking industry losses for buying back faulty mortgages from the government-sponsored enterprises to $33 billion from its initial $57 billion forecast made before the Ally Financial (GJM), Fannie Mae deal last week. On Dec. 27, Ally agreed to pay Fannie $462 million to settle potential rep and warranty claims of its mortgage unit ResCap. The agreement covered both mortgage-backed securities purchased by Fannie. While Ally noted the settlement "slightly exceeded" what it had in reserves, a Washington policy thinktank called it "miniscule" compared to the more than $292 billion in unpaid principal balance. Bank of America (BAC) said Tuesday it would pay Fannie Mae and Freddie Mac a total of $3 billion to settle its rep and warranty claims. While that figure was nearly 10 times the amount paid by Ally, it represents barely 2% of the $127 billion in unpaid principal balance on mortgages sold to Freddie Mac. The Federal Housing Finance Agency, the overseer of Fannie and Freddie, said Tuesday it approved the deal with Ally. KBW said because the GSEs agreed to such a low percentage of the unpaid principal balance, banks stand to lose 41% less than they originally estimated with the majority being repurchased agency mortgage-backed securities. "We believe that this settlement could be seen as a reasonable template for potential losses related to GSE loans for the industry as a whole (although actual losses for companies will vary meaningfully based on delinquency rates)," KBW said. "However, it might not be a good gauge for potential rep and warranty losses on private label MBS." Other claimants can still hold the banks responsible for faulty MBS they invested in. The GSEs hold roughly $240 billion in non-agency MBS, a "relatively small" part of the market. However, the agreement between BofA, Fannie and Freddie did not involve private-label securities purchased by the GSEs. According to KBW, private investors suing Ally Financial and other banks must hold at least 25% of any one securitization to obtain standing. "So while we continue to think private-label MBS related losses will remain low for the industry as a whole, we believe that litigation related to non-agency MBS is likely to continue for the foreseeable future," KBW said. Write to Jon Prior.