) plans to boost its mortgage repurchase reserves in the fourth
quarter of 2012. The decision comes on the heels of Freddie Mac's
increase in its repurchase requests. The company conveyed this
information to investors at
Goldman Sachs Group Inc.
) financials services conference yesterday, according to a
Government sponsored enterprises (GSEs) such as Freddie Mac and
Fannie Mae have already made repurchase demand on mortgages
written between 2005 and 2008. However, last Friday, Freddie Mac
informed lenders that it would initiate repurchase demands on
mortgages generated in 2004.
Therefore, to meet the increased repurchase demands, U.S. Bancorp
deemed it fit to beef up its reserve level. It would adversely
impact its earnings by one to two cents in the fourth
The Back Story
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 entire financial system. In
several situations, the legitimacy of the mortgages as well as
the documents was questioned. The mortgage originators did not
exercise due diligence in several cases and also deliberately
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 from the seller of the security.
In fact, a number of Wall Street Big banks have suffered severe
losses for costs associated with such activities.
PNC Financial Services Group Inc.
Bank of America Corp.
) too have experienced increased demands for mortgage repurchases
from the GSEs.
Currently, U.S. Bancorp is expected to report earnings of 75
cents per share in the fourth quarter. Though this elevation in
repurchase reserve would slightly hurt the company's earnings in
the fourth quarter, we believe that given its solid financial
position, the company can efficiently handle this mortgage
repurchase issue and make adequate reserves.
U.S. Bancorp also boasts an attractive core franchisee and
diverse revenue stream that helped it achieve strong performance
in the past years. Solid capital position and increase in lending
activities augur well. Yet, regulatory issues along with the
expectation of a continued low interest rate environment are
likely to limit the stock's upside potential in the upcoming
Currently, U.S. Bancorp shares maintain a Zacks #2 Rank, which
translates into a short-term Buy recommendation. As the
repurchase issue is expected to impact the company's earnings,
downward estimate revisions might surface in the near term and
affect the Zacks Rank.
BANK OF AMER CP (BAC): Free Stock Analysis
GOLDMAN SACHS (GS): Free Stock Analysis
PNC FINL SVC CP (PNC): Free Stock Analysis
US BANCORP (USB): Free Stock Analysis Report
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