Barron’s: Putbacks to Banks Could Be $134 Billion

During the housing boom, banks underwrote over $2 trillion in subprime, alt-A and option-adjustable rate mortgages underwriting could have losses as high as $700 billion, according to Amherst Securities research.

The problem is, they weren’t particularly careful in how they performed their duties.

Administrative and substantive errors, missing trust documents, misleading placement memorandums, all create a potential liability for the banks. The speed over quality underwriting procedures in securitizing and processing that $2 trillion in sketchy mortgages is well over $100 billion dollars. That’s according to an article in Barron’s this weekend, citing research from Compass Point Research & Trading, looking at potential putbacks to the banks.

The folks who bought this mostly AAA rated junk as mortgage-backed securities are not simply going to swallow the losses quietly. These investors –including Fannie Mae, Freddie Mac, Pacific Investment Management (PIMCO) and BlackRock (BLK) are seeking redress. Under certain circumstances, the terms of their purchase agreements allow them to “put back the mortgages to the banks.”

Bank of America, with its still awful Countrywide and Merrill acquisitions, has the greatest exposure, at over $35 billion. Citigroup somehow has a mere $8B in potential putback losses.


A Potentially Big Hit

Big banks could lose $134 billion if mortgage securities are put back to them, according to Compass Point Research & Trading.

Company/Ticker Estimated
Loss (bil)
% Tangible
Book Value
Bank of America /BAC $35.2 $2.11 17%
JPMorgan Chase /JPM 23.9 3.59 13
Deutsche Bank /DB 14.1 12.56 21
Goldman Sachs /GS 11.2 12.43 11
RBS Greenwich /RBS 9.4 0.10 12
Credit Suisse /CS 8.9 4.50 22
UBS /UBS 8.4 1.32 15
Morgan Stanley /MS 7.9 3.37 14
Citigroup /C 7.8 0.16 4
Barclays /BCS 3.6 0.18 3
HSBC /HBC 3.5 0.22 2
Total 133.8
* After-tax.

Sources: Compass Point Research & Trading LLC; Bloomberg; Inside MBS & ABS Asset Backed Alert



One caveat: Chris Whalen of Institutional Risk Analytics has looked at the full run of exposure of banks as both underwriters, processors, and trustees. He thinks the exposure is much much greater . . .


Banks Face Another Mortgage Crisis
Barron’s, NOVEMBER 20, 2010

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