Thursday, October 14, 2010

Financials Getting Crushed: "Quantifying The Full Impact Of Foreclosure Gate: Hundreds Of Billions To Start" (BAC; C; GS; JPM; WFC)

A threefer. First up, ZeroHedge:
As people finally realize that there is no getting away from a self-imposed (or sent from above) foreclosure moratorium reality, the next question is the quantification of what the hit to banks will be. As bank stock shares are demonstrating today, it will be substantial and is already starting to be priced in. According to FBR's Paul Miller, as cited by Bloomberg, "faulty foreclosures may cost U.S. lenders $2 billion for every month that home seizures are delayed and the tab could reach $6 billion... Investigations of how banks are seizing homes may prolong foreclosures by as much as three months, at a rough cost of $1,000 per month for each property in the pipeline. The biggest firms likely need to add staff to comb through the files, costing them each $1 million a year." This is a very a modest estimate. More importantly, a separate study by SNL Financial has determined that the total amount of residential (not commercial) mortgages in foreclosure between directly serviced, and those serviced for others, for the big three banks alone (JPM, WFC, BAC) is nearly a quarter of a trillion dollars! And this number will soon surge.
Keep in mind, as we disclosed yesterday, per JPM, the bank, which is a good proxy of the Big 3, keeps mortgages in the delinquent category for on average of 448 days before moving to foreclose (and 678 days in Florida and a stunning 792 days in New York). This means that banks, and especially regional banks, are about to experience the mother of all delinquency-to-foreclosure cliff events, as squatters now certainly will have no intention of ever paying down their mortgage. Which also means that the quarter trillion in foreclosed mortgages are about to explode by orders of magnitude. The hole could end up being as large as a trillion if one throws in the CMBS properties that are delinquent and in foreclosure ($61 billion in August per RealPoint). And poof, there goes the trillion dollars currently sitting in cash and doing nothing (as well as a generous helping of excess reserves) for now... but not for much longer.
Below is the SNL Financial estimation of properties in foreclosure direct and serviced for others. The number is a whopper. It also excludes all the regional banks which likely account for a comparable number cumulatively.

Look for the number in the bottom right to skyrocket as more research is done on this topic. Add a few trillion in puttable [R|C]MBS and we are starting to talk TARP 2 money.

And two from MarketBeat:
Foreclosure Mess Battering Banks Thursday
There’s blood in the financial sector Thursday. It’s down 1.3%, amid drops of more than 3% at Bank of America, Citigroup and Wells Fargo. The ongoing concern seems to be the foreclosure-document mess. So how big a deal is the foreclosure mess?
Analyst Paul Miller of FBR Capital Markets estimates that losses related to this foreclosure issue could range between $6 billion and $10 billion for the entire industry. That amount could be easily absorbed, making it an issue to earnings rather than the capital foundations of the banks, he wrote in a note out Thursday. He wrote:
Further, it is unlikely that freezing the foreclosure process is the goal of investigations into foreclosure practices; rather, state officials are probably aiming to compel lenders to reduce principal loan balances, especially ahead of the mid-term elections. While we had previously believed that this was an election issue, we now think that this could materialize into a longer-term concern. Overall, we believe that the real cost to the industry is going to be the drag on the foreclosure process, which could delay any recovery in the housing market that might be on the horizon.
Of course every analysts has an opinion....MORE
Foreclosure Mess: Here’s Who is Exposed
In light of the interest in the foreclosure mess this chart — taken with permission — from a note from Evercore Partners equity analyst Andrew Marquardt would be of value to buyers and sellers of bank stocks.
The banks are still getting hammered. Bank of America is down more than 5%, Wells and Citi are both down more than 4%....LIST