Wednesday, February 3, 2010

New Troubles for Big Banks

Some interesting developments in the mega banking world as the game has gone from trying to save the likes of BoA and Wells Fargo to punishing them from their bad bad deads. Now you have the big finance giants, Fannie and Freddie, set to release the hounds on the mortgage originators. Remember Wachovia (bought out by Wells) and Countrywide (bought out by Bank of America)? Well they originated alot of questionable loans. According to cbsmarketwatch, there may be many billions at stake. Thanks goes to Pete.

Just when they thought the worst of the mortgage crisis was behind them, billions of dollars in bad loans from the debacle may be rising from the dead and creeping back on the balance sheets of the largest U.S. banks.

Well that is not a good start. You mean you just can't forget they ever existed? Ummm, nope. Someone has to take the losses.

Big lenders including Bank of America, J.P. Morgan Chase and Wells Fargo may be forced to repurchase troubled home loans from insurers and mortgage-finance giants like Freddie Mac that had agreed to take on risks associated with those assets during the real estate boom.

How much are we talking about?

Mortgage insurers such as MGIC Investment have rescinded, or refused to pay, roughly $6 billion in claims from delinquent home loans since January 2008, rating agency Moody's Investors Service estimated in a December report. That could leave banks that originated the loans on the hook for losses.

Bond insurers are expecting to recover more than $4 billion from banks for breaches of representations and warranties on residential mortgage-backed securities they guaranteed, Moody's also noted.

That isn't all that big of numbers but wait, if Fannie and Freddie get involved, you could be talking BIG numbers.

Bank of America and Wells Fargo may be particularly exposed on this front, according to Institutional Risk's Whalen.

Fannie and Freddie "are going to tear 50-100 basis points easy out of the flesh of the banking industry in the form of loan returns," he wrote.

Wells Fargo said last month that $1.2 billion in fourth-quarter income from mortgage loan originations and sales included a $316 million increase in reserves to cover loan repurchases. The bank disclosed no such reserves in its third-quarter earnings release.

Once again not that big of numbers but according to some other stuff I read, it could be around $15 billion to Wells Fargo before it is all said and done. Now, that is a big number even for Wells. Stock market would not like that.

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