- 18Oct
Both J.P. Morgan Chase and Citigroup managed to play down the foreclosure debacle during recent earnings reports. Bank of America can't afford to do the same when it reports third-quarter results Tuesday.
Bank of America has been at the center of the mortgage storm since it halted foreclosures earlier this month in all 50 states because of faulty affidavits. It has the largest mortgage-servicing arm among big banks and also could be on the hook for problems with loans originated by Countrywide Financial, which it bought in 2008. Its shares were hit hardest during last week's selloff of big bank stocks.
On Monday, the bank started to try to calm markets, saying it would amend documents in 102,000 foreclosure ac
tions, expects less than 30,000 foreclosure-sale delays and will restart foreclosure proceedings later this month in 23 states.
But Bank of America also has to address investors' biggest concern—whether the foreclosure issues reflect deeper problems with loans' legal status. If that were the case, banks could face a big risk from private investors demanding repurchases of securitized mortgage bonds.
Banks are already facing repurchase demands from Fannie Mae, Freddie Mac and mortgage-insurance firms, for bad loans made during the housing bubble. In the first half of this year, Bank of America took $1.7 billion in charges because of such requests, while outstanding repurchase demands at the bank totaled $11 billion.
The fear is that repurchase requests could swell if foreclosure problems are due to loans' legal status. In that case, private investors may jump into action.
J.P. Morgan analysts on Friday estimated the banking industry as a whole may face $40 billion to $80 billion in repurchase losses beyond those due to put-backs from Fannie, Freddie and insurers.
Given legal hurdles facing private investors, no one is quite sure how this will play out. One hedge fund that is "short" Bank of America's stock, Branch Hill Capital, has argued the bank could face total repurchase-related losses of nearly $60 billion in today's money.
That strikes many as way too high. But with Bank of America's stock trading at about half its second-quarter book value, the onus is on it to prove the naysayers wrong.
