Smaller servicers preparing for AG settlement inclusion: FBR Capital
The loss reserves of the nation's smaller mortgage servicers increased in the fourth quarter after declining in the previous three quarters. Analysts interpret the sudden shift as a a sign of an expanding settlement between the five largest mortgage servicers and the multistate coalition of attorneys general. Both PNC Financial Services (PNC) and U.S. Bancorp (USB) reported one-time provisions in the fourth quarter for "mortgage-related litigation matters." SunTrust Banks (STI), which said it is likely to be involved in a settlement, is waiting to take a provision until the settlement talks are closer to finalization. "While (PNC and U.S. Bancorp) could give very few details about the charges due to the ongoing discussions about the matter, we believe the companies are getting invited into the foreclosure settlement talks between the top five mortgage servicers, state attorneys general, the justice department and the Office of the Comptroller of the Currency," analysts at FBR Capital said. Analysts estimated the loss rate for PNC and U.S. Bancorp per foreclosed loan in their servicing portfolio will be 4.5% of the outstanding unpaid principal balance on foreclosed homes. U.S. Bancorp had about $3 billion of homes in foreclosure in its servicing portfolio in the third-quarter of 2011. The bank is taking a $130 million charge, equating to a 4.4% loss per foreclosed unpaid balance. PNC had $5.2 billion of homes in foreclosure in its servicing portfolio in the third quarter and is taking a $240 million charge, equating to a 4.6% loss per foreclosed unpaid balance. Applying the same loss rate to SunTrust’s $7.2 billion foreclosed unpaid balance in its servicing portfolio means SunTrust would take a $325 million charge related to the foreclosure settlement, the analysts said. The Obama Administration reached out to several banks that so far have not been part of the settlement talks, including the aforementioned banks and HSBC (HBC). Some media outlets said a foreclosure settlement could be announced during Tuesday's State of the Union address from President Barack Obama. However, a spokesman for Iowa AG Tom Miller, said not to expect a full announcement this week. Any initial settlement would only include the five largest mortgage servicers that were originally included in negotiations. Smaller servicers would be added afterward. FBR analysts said if a settlement is announced, they see it as a positive for the industry as banks can move on from lengthy litigation. They said most of the expense associated with a settlement is likely to come in the form of "soft dollars," which may already be charged off. Write to Justin T. Hilley. Follow him on Twitter @JustinHilley.