Foreclosure-process errors that lead to putbacks of questionable home loans could cost the banking industry up to $120 billion, according to a note J.P. Morgan sent to clients late Friday.
Putback losses — which arise when investors in a mortgage-backed security demand that the banks that issued the security buy it back at par — are more likely to cost the industry in the neighborhood of $55 billion over a period of years, the note states. But the size of the losses will depend partly on the mix of loans that are returned to the banks, and under some scenarios, the figure could be more than twice that base estimate.
In its 43-page report, authored by a team of analysts in J.P. Morgan’s fixed-income strategy group, the bank argues that “many of the mortgage foreclosure problems highlighted in the past few weeks are process oriented and can be fixed in the near term.”
Those problems include the moratorium J.P. Morgan and other banks have placed on the foreclosure process and concerns about “robo-signing,” where foreclosures are completed without the required review of documentation.
Still, the analysts argue the putback risk is a potentially serious problem, the scope of which will depend on how many government-sponsored loans are returned to banks. Investors so far have been successful in putting back GSE, or agency, backed mortgages 40% of the time, whereas they’ve only succeeded at putting back private-label mortgages 20% of the time in most cases. But the latter loans could prove far more expensive for banks to buy back.
Somehow I think that percentage is going to have to go up a little closer towards 100%, and fast. $120 billion is just a starting number when you factor in all the litigation on the way. This isn't going to be pretty, folks. It's "reckoning" with a W-R-E-C-K.
As I said earlier today, the banks are going to have to eat metric tons of these bad mortgages because there's no way the underwriters will go forward without paperwork, meaning that the banks will have to buy out the mortgage loans. When the investors get wind of this, particularly the big hedge funds that bought these cubic blocks of processed securitized mortgage cole slaw, they are not going to be happy holding a bunch of crap that has about the same asset value as, well, cole slaw.
They are going to LAUNCH ALL LAWYERS. It will be fun fun fun as the big hedge funds go after the big banks with thousands, hundreds of thousands, maybe millions of homeonwers on the battlefield as ready victims of collateral damage. And they're all going to want get out of foreclosure free cards, which the banks are looking like they will have to provide. $120 billion won't even begin to cover it.
Exquisite, glorious chaos at its finest.