PNC Financial Services Group Inc.
) plans to boost its residential mortgage repurchase reserves by
around $350 million in the second quarter of 2012. The decision
follows the company's experience of recently elevated levels of
government sponsored enterprise (GSE)-related repurchase demands.
The company has conveyed this information to investors at
) financials conference yesterday.
The increased levels of GSE-related repurchase demands for PNC
Financial are primarily in 2005-08 vintages and the major reasons
cited for the recent claims include property values and missing
documentation. The reserve additions will result in life-to-date
accrued losses of $1.6 billion.
The GSE, whose name was not being referred by the PNC Financial
management, insists on demanding mortgage repurchases by PNC
Financial. The mortgages are mostly originated by National City
Corp. which was acquired in 2009.
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 buyback 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
In fact, a number of Wall Street Big banks have suffered
billions of losses for costs associated with such activities.
Besides 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.
For PNC Financial, an increase in mortgage repurchase demand
remains a concern.Moreover, a tepid economic recovery, continued
low interest rate environment and regulatory issues seem to
somewhat limit growth in the company's profitability.
However, the continued strengthening of the balance sheet should
propel its earnings ahead. Moreover, strategic acquisitions in the
recent times should also help in generating revenue growth. Stress
test clearance, dividend hikes and share buybacks also serve as
positive catalysts for the stock.
PNC Financial 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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