First Horizon National Corp.
) expects to incur charges of $272 million in the second quarter of
2012 for mortgage repurchase and pending litigation issues. The
company will beef up its mortgage repurchases reserve by about $250
million to meet repurchase demands from two government-sponsored
entities (GSEs), Fannie Mae and Freddie Mac.
This addition in mortgage repurchase reserve will be recorded as
expense by First Horizon. At the end of the first quarter, the
company's reserves stood at $161 million. For meeting repurchase
activity in the second quarter, around $60 million is expected to
be realized by First Horizon as losses. Therefore, at the end of
the second quarter, the company's mortgage repurchase reserve is
likely to stand at $351 million.
Considering the earnings charges and losses to be realized in
the second quarter of 2012, the cumulative total of losses realized
to date as well as reserves for First Horizon's mortgage repurchase
exposure to the two GSEs is around $750 million. The remaining
charges are for the company's litigation issues.
Earlier in June,
PNC Financial Services Group Inc.
) also announced that it will boost its residential mortgage
repurchase reserves by around $350 million in the second quarter of
2012. The decision stemmed from the company's experience of
recently elevated levels of GSE-related repurchase demands. The
mortgages were mostly originated by National City Corp., which was
acquired in 2009.
In fact, a number of big Wall Street banks have suffered
billions in losses for costs associated with such activities.
Besides First Horizon and PNC Financial,
Bank of America Corp.
) is also experiencing increased demands for mortgage repurchases
from the GSEs. The mortgages originated primarily from Countrywide
Financial which Bank of America had purchased in 2008.
It was found in the aftermath of the real estate market collapse
in 2008 and the financial crisis that mortgage and mortgage backed
securities occupied a significant share of the total financial
system. In several situations, the legitimacy of the mortgages as
well as the documents was doubtful. The mortgage originators did
not complete due diligence in several cases and also deliberately
Now when banks sell mortgage-backed securities to investors and
GSEs, there is a clause that can force a bank to buy back the
securities in the event of fraudulent or faulty underwriting or
origination of the underlying mortgage. Therefore, in cases of
fraudulent and faulty origination documents, the holder of the
mortgage-backed securities demands buybacks by the seller of the
We believe mortgage repurchase expense will continue to remain
an overhang for First Horizon. While the company sold its mortgage
origination and servicing platforms in 2008, it bears the liability
for the conforming conventional mortgage loans purchased by the
GSEs from First Horizon which were originated over many years till
Though the winding down of the non-strategic part of the loan
portfolio bodes well, it will remain a drag on First Horizon's
earnings going forward. A shrinking revenue base and regulatory
issues, tepid economic recovery coupled with a low interest rate
environment and mortgage exposure serves as headwinds for the
Yet First Horizon's endeavor to lower its exposure to problem
loans is impressive. The company is also aiming at controlling
costs, strengthening capital levels, and improving long-term
profitability by focusing on growing its core Tennessee banking
franchise, which would augur well going forward. Moreover, share
buybacks give a boost to investors' confidence in the stock.
First Horizon shares maintain a Zacks #3 Rank, which translates
into a short-term Hold recommendation. Considering the
fundamentals, we also maintain our long-term Neutral rating on the
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