Morgan Stanly Research Here is a research paper from MS highlighting the firestorm of news related to the “ mortgage mess” that hit the market in the past few days. The issues include “robo-signing”, the right of MER to foreclose, the assignment of mortgages to securitization trusts, and putback risk. Although some of these issue such as putbacks represent a real threat to the banking industry, the media has somewhat overestimated the extent of some of these issues and the respective costs to the industry.
Putback losses MS estimates that putback losses to the entire banking industry can account to 105 billion on a base case scenario over the course of the next two to four years, while, in another research report, JPM speculates that losses could add up 55 billion in a base case scenario over the course of the next five years. As you can see, the putback risk is real but it’s certainly “manageable” for banks.
Conflict of interest The recent lawsuit filed by PIMPCO, the New York Fed and Blackrock against Bank of America is embedded with HUGE conflicts of interest that deserve some attention. First, BlackRock is the largest holder of Bank of America shares, owning about 5.35% of the outstanding BAC shares, for a total value of $6.6 billion. Second, PIMCO has the most to lose if the MBS crisis escalates and if all the MBS are unwound as they hold large positions. Third, the FRBNY’s effort to force the buyback of several billion of mortgages runs against the Fed’s goal of strengthening the banking system and will certainly defeat the purpose of the Fed. I will let you be the judge of this.