Fitch: U.S. Banks' GSE Mtge Repurchases Weigh on Earnings; Private-Label Remains a Concern

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NEW YORK--(BUSINESS WIRE)-- Losses resulting from loan repurchases and any related settlements are unlikely to materially affect the capital adequacy of the largest U.S. banks, according to a new report published by Fitch Ratings.

While repurchase risk has limited the near-term upside momentum in the ratings of certain institutions, Fitch does not see any immediate negative rating implications at this point. However, growing litigation risk related to private-label residential mortgage backed securities (RMBS) may have negative rating implications if court rulings are decidedly on the side of RMBS investors. Fitch also expects that repurchase losses will continue to weigh on bank earnings over the near term.

Recent settlements with the main housing government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, have helped establish some certainty around a portion of the potential exposure at the largest banks. However, potential future claims from investors in private-label securities, financial guarantors (FGs) and mortgage insurers (MIs) represent a growing concern.

In August 2010, Fitch estimated that the top four U.S. banks would sustain losses in the range of $17 billion-$42 billion, based on the amount of delinquent mortgages in the GSE portfolios and estimates for the put-back and recovery rates. While these estimates remain largely the same, it now seems that the lower end of the range is the most likely outcome given recently announced settlements between some banks and the GSEs.

Repurchase claims on problematic mortgage loans continue to pose a risk to the largest banks, which were the most active originators and issuers of agency and private-label RMBS. While agency RMBS represented over half of the 2005-2008 RMBS issuance, the private-label transactions have tended to exhibit weaker performance, which increases the potential risk for repurchase claims. That being said, investors in these transactions generally have weaker representations and warranties and face significant hurdles in gathering necessary information and pursuing claims.

The level of uncertainty with respect to claims on private-label securities is a focal concern regarding banks' residential mortgage repurchase risk. Fitch will consider any future settlements and/or litigation outcomes with the GSEs, private-label investors, FGs or MIs in order to determine their respective impact on the capital and financial performance of the affected entities.

The full report 'U.S. Banks' Mortgage Repurchase Risks: GSE Claims Abate as Private-Label Remains a Concern' is available on the Fitch web site 'www.fitchratings.com.'

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research: U.S. Banks - Mortgage Repurchase Risks: GSE Claims Abate as Private-Label Remains a Concern

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=600745

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