Dick Bove: Mortgage Put-Back Apocalypse Could Cost Banks More Than $150 Billion
Chris Whalen has been telling us where this is headed. Banks are not equipped to be property managers. Some sort of government bailout, or other such ownership vehicle that creates a REIT to handle the millions of foreclosures, is coming.
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With new threats emerging to the housing and mortgage markets, investors have recently gotten jittery about bank stocks. I recently spoke to famed bank analyst Richard Bove to get his take on the mortgage mess.
What's foremost on Bove's mind these days? In a word, putbacks. "The putbacks are the critical issue," he said.
What exactly is a putback? A putback, in its simplest form, is a forced repurchase of a security — typically due to a claim of misrepresentation or fraud. In the domain of the mortgage market, what would an example of a putback look like? Let's take as an example a Government Sponsored Entity (GSE) like Fannie Mae or Freddie Mac.
These GSE's, of course, hold enormous quantities of mortgages on their books. If the GSE discovers that one of the mortgages they own has faulty underlying loan documentation they can demand that the originator repurchase the mortgage.
According to sources within the mortgage industry, there has been an uptick in this type of repurchase over the last several months. (Harry Terris, of American Banker, has written an excellent primer for Investment Dealer's Digest.)
Not surprisingly, analysts speculate that large scale implementation of putback demands between the GSE's and other institutions and the mortgage originators/aggregators could result in a litigation bonanza.
Bove thinks the litigation process is going to be both time consuming and costly. "The lawsuits are going to last 3-5 years," he says.
Bove maps out a three tiered litigation nightmare: The first wave of lawsuits will be to discover the mortgage documents which banks are not currently willing to disclose. The second wave of suits involves mortgages where the documents were fraudulently underwritten, or were fraudulently assigned to the pools. The third wave of litigation would be to decide which mortgages are going to be put back and to whom.
(My colleague John Carney has recently published a counterpoint article, arguing that the putback crisis will not be the apocalypse that has been projected.)
What's the magnitude of the litigation? Assigning a dollar value to the potential liabilities on this sort of case is notoriously difficult business — but Bove believes the potential liabilities may run over $150 billion mark.
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And there's more.
LL: In addition to the foreclosure issue, you have the put-backs. But its a well known fact mortgage loans are notorisly known to have errors in them.
We're seeing Fannie and Freddie put-back some of these loans because of that. Is there a tsunami of put-backs forming?
AS: We could have a tsunami. The loan put-back issue is a mirror to what we are seeing with the foreclosure issue right now. Loans are sold based on reps and warranties. Sometimes there are technical difficulties in these reps and warranties. Sometimes there are substantive deficiencies.
Now these technical deficiencies are being used simply to redistribute the losses on these loans. And there is going to be significant litigation on this for a long period of time. For Fannie and Freddie specifically, these are disputes with their business partners. But this is not the market working it.
Fannie and Freddie are under enormous pressure from their government minders to do these put-backs. So in some sense, its the government seeking to recover from their support of Fannie and Freddie. This put-back issue really needs to be looked at in that specific light.
There is a lot of blame to go around on these loans. Fannie and Freddie and other secondary mortgage players knew what they were buying and the risks associated with it. Everyone in the chain was counting on two things: that interest rates would not go up, and that property values would not go down. Everyone gambled but lost.
LL: You have gone through hundreds of these foreclosure and put-back documents. What trends are you anticipating next?
AS: It is really difficult to predict which way this is going to go. The one thing I would say with some certainly is as this litigation progresses and when everybody starts to get access to the emails and documents on these loans, it will be clear that those who are suing understood what they were getting.
These were sophisticated financial players and everybody knew what a "no documentation loan" meant in terms of risks. We'll see numerous governmental investigations. Some criminal in nature.
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Further reading:
Oct 19, 2010 at 9:19 PM
Reader Comments (26)
It will not cost the banks a dime, but John Q. Public better hold onto his ass.
The other thing I would like to address about this "wonderful" (for Gobie, that is sarcasm) bank scandal is where a lot of these "investment vehicles" went after the mortgage backed security portfolios were bundled full of junk loans and sold, given fraudulent ratings concealing their junk status, and then sold.
They were sold to many of the pension funds in America that people would rather hate more than the banksters. To date 232 US mortgage banks have failed because of the US real estate disaster. What does this mean? It means they cannot repay the investor/pension fund for the failed mortgage backed security that was fraudulently sold to them.
http://www.prweb.com/releases/2008/03/prweb738884.htm
And the Bankers Manifesto marches on...
http://globaleconomicanalysis.blogspot.com/2010/10/smoking-gun-new-evidence-of-how-wall.html
The ratings on the securities the funds bought were fraudulent. To blame the pensioners (workers), would be like blaming cars for drunk drivers. Yet again, lets give the real culprits a pass, it seems to be bred into the American soul to blame the little guy instead of the true criminals.
Anybody want to buy a bridge in Brooklyn, I have one cheap.
Don't answer that, I am kidding.
"they better start holding those accountable who manage their retirement funds"
Try holding your banker accountable, it is the same thing. In the end the fund managers and bankers will go hand in hand off to Costa rica (or where ever) to enjoy the rest of their lives on the stolen loot. Or run for political office as some are doing now, and the herds will love them for their thefts as is happening in my states Governors race now.
http://www.youtube.com/watch?v=gwaAVJITx1Y
Danny Alexander reveals 500,000 job cuts in document gaffe
Half a million public sector workers are to lose their jobs as a result of the comprehensive review of government spending, official documents have disclosed.
http://www.telegraph.co.uk/news/newstopics/politics/liberaldemocrats/8074669/Danny-Alexander-reveals-500000-job-cuts-in-document-gaffe.html
Yes, that is that spy on your neighbor, brownshirt thing. Those people clapping are HOA members dying to join.
You thinking about joining?
Just imagine how bad this mess would be with even more deregulation than has occurred over all these years. The lottery will be the new retirement system, however even it could end up corrupted to serve only the rich.
http://www.huffingtonpost.com/2010/10/18/foreclosure-mill-employee_n_767174.html?source=patrick.net#entry_12345
Gomp...What do you mean join?
DB told me that the idea of this civilian army is crazy talk and shouldn't be talked about. There is nothing to join because it is just a rumor with no basis in fact.
You can see her Gomp…
From DB…z...i deleted it the video because it was that bull shit about civilian police forces under obama..i've been hearing that crap since day 1...let's try not to be too off the wall here...
Gomp, you answered my question with your answer, if it is off the wall they you too are off the wall because you asked if I was going to join. I know you will claim sarcasm for that question, your go to move for the things you say but…
I guess the things that Obama says are off the wall which I can get my hands around, however, that doesn’t mean that Obama is not willing to try to form this army of civilians. We have seen him try to nationalize healthcare which is off the wall. We have seen him seize the banks rather than letting the failures fail which is off the wall. We have seen him hire a bunch of Marxist czars for his administrative civilian army which is off the wall. He realizes that you have to have people in the government at high levels that will not quesiton your orders when the Reichstag fires are lit and Marshall Law is declared. Yes DB, Obama is off the wall but to ignore the things he has said when he has gone to great lengths to put the wheels in motion to achieve the of the wall objectives is foolish.
http://www.infowars.com/obama-information-czar-calls-for-banning-free-speech/
Sorry for not rolling over, that’s your girlfriend’s job, not mine.
Sigmund Freud
Paris Hilton
Gobie,
It is very screwed up, and you are getting better at picking up sarcasm. In all seriousness though, I do think if this thing gets off the ground that HOA's will dive right in. Especially if they give medals for being busybodies.
Such was the way in Germany...
Yet business will continue to do stupid things like give discounts for flying lessons if you don't need to know how to land, or selling every pre paid cell phone in the store to people wearing Burka's, while those phones are being sent out of the country for remote detonators (recent e mail), etc.