Mortgage repurchase claims could prove to be costly for
Wells Fargo & Co.
). According to its quarterly filing with the Securities and
Exchange Commission, its losses might exceed the recorded mortgage
repurchase liability by as much as $2.6 billion, up 13% from the
prior quarter. However, the company said that this loss estimate is
reasonably possible but does not represent a probable loss.
As a matter fact, Wells Fargo is experiencing increasing demand
for mortgage repurchases from government sponsored entities (GSEs)
Fannie Mae and Freddie Mac, related to loans made from 2006 to
Notably, Wells Fargo's total reserves for mortgage repurchase
requests stood at $1.8 billion at the end of June. This represents
an increase from $1.4 billion recorded at the end of March. The
company has made provisions of $669 million in the second quarter
of 2012, up 56% sequentially and significantly ahead of the
provisions of $242 million recorded a year ago.
In the aftermath of the real estate market collapse in 2008 and
the financial crisis, 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 ambiguous. The mortgage originators did not exercise
due diligence in several cases and also deliberately defrauded.
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 can demand buybacks by the seller of the
Others in the Same Pool
Not only is Wells Fargo suffering from this mortgage mess and
experiencing higher repurchases requests, other companies such as
First Horizon National Corp.
PNC Financial Services Group Inc.
) are witnessing similar increases in buyback demands. These
companies have substantially beefed up their reserves for the
rising demands and consequently their second quarter 2012 results
bore the brunt.
In fact, a number of Wall Street biggies have suffered losses in
the billions for costs associated with such activities.
Besides Wells Fargo, First Horizon and PNC Financial,
Bank of America Corp.
) is experiencing increased demands for mortgage repurchases from
the GSEs. The mortgages originated primarily from Countrywide
Financial, which Bank of America had purchased in 2008.
We believe that increasing demands for mortgage buybacks would
remain a headwind in the quarters ahead for Wells Fargo. However,
we believe that over the long term, investors should not be
disappointed with their investments in Wells Fargo given its
diverse geographic and business mix, which enables it to sustain
consistent earnings growth.
Going forward, we believe that strategic acquisitions will help
expand Wells Fargo's business and improve its profitability. The
company is also capitalizing on the deleveraging activities of
Though a tepid economic recovery, a low interest rate
environment as well as regulatory issues would continue to remain
as overhangs, we believe that given its solid profitability
potential, the company can efficiently manage this mortgage
Wells Fargo currently retains a Zacks #3 Rank, which translates
into a short-term Buy rating. Considering the fundamentals, we also
maintain a Neutral recommendation on the stock.
BANK OF AMER CP (BAC): Free Stock Analysis
FIRST HRZN NATL (FHN): Free Stock Analysis
PNC FINL SVC CP (PNC): Free Stock Analysis
WELLS FARGO-NEW (WFC): Free Stock Analysis
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