Despite realtor pleas, mortgage lending standards continued to tighten through 2012
realtors never want to see a deal die because the buyer can’t get financing. Lawrence Yun, chief economist for the NAr, recently lamented about “unnecessarily tight credit standards” and “frictions related to obtaining mortgages.” In a realtor’s world view, there are no unqualified buyers. Back during the height of the housing bubble, the lending community agreed with them, and billions of dollars worth of loans were underwritten to people who had no hope of paying back the money absent continuing rapid appreciation. realtors should be careful what they ask for because getting their way with the lending community is what caused the devastation we are dealing with now.
The reason lending standards are tight, and will continue to tighten, is because recent borrowers are still defaulting on their mortgages, and the investors in these mortgages, including the GSEs, are demanding the originators buy these bad mortgages back. Whatever standards the GSEs might enact, if a loan goes bad, the GSEs demand the originator buy it back, so originators have responded by enacting their own standards even tighter than the GSEs to avoid these costly buybacks.
It seems that when Bank of America puts one mortgage-related problem behind it another pops up. This time the new problem is in the form of $6.8 billion in new repurchase claims.
The nation’s second largest bank had a decent quarter posting a $2.5 billion profit thanks to cost cuts, some improvements in its credit portfolio and lower provisions for loan losses. Bank analyst Nancy Bush calls is a “relatively clean quarter” compared to last year the bank reported a painful loss of $8.8 billion tied to a big settlement it made with some investors over mortgage securities gone sour.
Despite that huge settlement more investors are creeping up and demanding that BofA buy back securities they say were flawed. The increased claims had many analysts asking CEO Brian Moynihan when exactly the legal battles will level off.
In short, there’s no solid answer. Investors are going to keep battling BofA until they reach the best possible deal in repurchase claims. And when one big settlement is done with (like last year’s $8.5 payout to 22 investors including PIMCO, the Federal Reserve Bank of New York and BlackRock) others will fight harder to get their piece of the pie.
… Who exactly is asking the the bank to buy back soured mortgage securties? Bank of America puts them into two categories: government sponsored entities (GSEs like Fannie Mae and Freddie Mac) and private label investors (those can be big institutions like BlackRock that bought into mortgage pools).
The GSE claims have been interesting to watch because of the way the talks have evolved–mostly for the worse. Last year BofA pointed out the problem it was facing with the GSEs in an SEC filing saying that it’s “experiencing elevated levels of new claims” from the government sponsored entities (GSEs) and that “the criteria by which the GSEs are ultimately willing to resolve claims have become more rigid over time.”
Good. The administrators of the GSEs are looking out for the US taxpayer and trying to keep the losses to a minimum. The banks want to shift all these losses to the US taxpayer, and without good people watching over the GSEs, they would succeed. The reluctance of the GSEs to lose even more money is prompting them to force these buybacks. These buybacks are causing the banks who originate mortgage loans to tighten their standards to prevent these buybacks. This causes the realtors to whine and complain that supposedly qualified buyers are being denied mortgages.
That’s surely been the case as claims by the GSEs shot up from $5 billion last year to $10.9 billion in the most recent quarter–that’s a 110% increase. Between March 31 and June 30th alone the claims from GSE are up 35% from $8.1 billion in the first quarter.
Some of this is related to the ongoing price declines, and some is due to the weak economy, but much of it is due to lending standards still being too lax to prevent further losses.
Here’s what BofA said about the GSE claims in its presentation today:
[Fannie Mae’s] repurchase requests, standards for rescission of repurchase requests and resolution processes continue to be inconsistent with their own past conduct and our interpretation of our contractual obligations. These developments have resulted in an increase in claims outstanding from the GSEs. (We remain in disagreement with [Fannie Mae’s] over claims submitted.)
Bush explains that the GSEs are facing pressure by lawmakers to get their acts together and therefore looking at every mortgage security possible to score some dollars from BofA.
The argument is over the conditions I described above. Is the delinquency causing the buybacks related to poor underwriting — something BofA does control — or a poor economy — something BofA does not control.
The private label repurchase claims are perhaps more worrisome because Bank of America already agreed to a $8.5 billion settlement last year with the big names mentioned above. Nonetheless there are more private-label investors still out there with their own beef to pick with BofA and were, it appears, not part of last year’s settlement.
Private label repurchase claims jumped 405% from last year from $1.7 billion to $8.6 billion. But to be fair, let’s look at the repurchase claims on the private side after the big Bank of New York/BlackRock/Pimco settlement. In the first quarter of 2012 private label repurchase claims stood at $4.8 billion so that’s still a 79% increase in a matter of three months.
Every MBS administrator with a BofA loan in it’s portfolio is likely seeking some money. BofA will likely settle some of these claims, but they need to find some way to get closure. Part of the extortion settlement with the Attorneys General around the country contained language stifling further claims against them. BofA can’t make such an arrangement to protect themselves from private lawsuits.
Here’s BofA on the private label troubles:
Increases in private-label new claims are primarily related to repurchase requests received from trustees on private label securitization transactions not included in the BNY Mellon settlement, including claims related to third-party sponsored securitizations that include monoline insurance
Despite all the mortgage repurchase claims Moynihan seems focused on cleaning up the bank and is doing well despite the huge odds he’s faced. Much of that clean up is coming in the form of a cost cuts and the sale of non-core assets. The bank already announced $5 billion in cuts last year and now it appears $3 billion more in cuts are on the way. Bank of America has done 46 divestments since February 2010, according to SNL data.
“He’s on track to deliver what he says he will,” Bush says.
BofA is a mess, and despite the cost cutting, it’s not clear that the company will survive. Whether or not it implodes from it’s own problems, it should be broken up for the simple reason it is deemed too big to fail.
The bottom line is this: repurchase agreements are driving the tightening of credit standards. Until the economy strengthens and house prices start moving up on a sustained basis, delinquencies will remain high, and the threat of buybacks will tighten standards further. realtors will complain, but since their money isn’t at risk, their complaints will be ignored.
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