Thursday, October 14, 2010

Quantifying Foreclosure Gate

The estimates are starting to come in on the dollar damage to banks because of politically explosive Foreclosure Gate.

Here's Zero Hedge with  the most negative scenario:

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).
Meanwhile, Jamie Dimon tries to stay cool, while admitting "mistakes were made":

JPMorgan Chase & Co. probably will pay an “incremental” sum to settle foreclosure investigations and there’s almost “no chance” the bank made mistakes in seizing homes, Chief Executive Officer Jamie Dimon said.

“It will cost us some money to go back and make sure it’s done right; it will delay some foreclosures,” Dimon told reporters on a conference call today after posting quarterly results. “But the whole mortgage issue costs us so much money now, to me it will be incremental.”

The lender is in talks with state attorneys general and will correct any errors tied to foreclosures, Dimon said. About 115,000 files are under review in 41 states, according to the bank. The review and resulting clean-up will likely take three to five weeks, Dimon said.

“We have to have in-depth conversations” with state and federal officials, Dimon said. “Maybe mistakes were made, but not where someone got evicted out of a home that shouldn’t have been.”

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