Bank Of America: Piercing Its 'Opaque' Balance Sheet - Part II
The market hates Bank of America ( BAC ). There is no other way to explain its meteoric drop in the past year. Here are a few reasons for this hatred:
Impending/potential litigation lawsuits, and potential liabilities associated with these lawsuits. Overvaluation of the assets, due to the supposed suspension of mark to market. (I wrote two articles about this that you can read here and here .) Off-Balance sheet exposure: Related to potential repurchasing of mortgages that were misrepresented during their 2004-2008 mortgages securitizations.This article will deal primarily with shedding light on Bank of America's off balance sheet exposure. As is stated in Bank of America's 10-Q, the vast majority of repurchase requests are associated with loans that were originated from 2004-2008.
What exactly is this Off-Balance Sheet Exposure?
Basically, this exposure equals being forced to buy back (or indemnify investors) misrepresented mortgages from GSEs (includes other government organizations such as HUD, VA etc.), monoline insurers, and private securitization investors and trusts. Needless to say, the vast majority of this exposure comes from Countrywide. The majority of these repurchase requests come from the MBS that were sold from 2004-2008. Bank of America currently has $11.7 billion in unresolved repurchase claims. You can compare this with the $16.3 billion in representations and warranties that are available to cover these claims. Generally speaking, a loan is more likely to be eligible for repurchase if the borrower has made fewer than 25 payments. Historically, private securitization firms have a harder time getting bad loans repurchased (versus GSEs) due to their less stringent requirements on mortgage underwriting. All data is sourced from Bank of America's most recent 10-Q .
There are three sources from which these potential/current liabilities emanate: Government Sponsored Enterprises (Fannie Mae, Freddie Mac), Monoline Insurers, and private-label securitization investors and trusts.
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This means if an insured loan that was sold to the GSEs defaulted, and the mortgage insurer refused to pay the lender; the GSEs could force a repurchase of the loan no matter the circumstances. Since banks have until the end of next summer to appeal
The US Treasury Department has turned a blind eye to banks and loan servicers that have violated the rules of its main loan-modification program. The White House did recently try to patch up a related program aimed at helping mortgage holders refinance
This improves their balance sheet and enables them to renegotiate loans at a fixed rate that stabilizes the Americans monthly payment for keeping a roof over their head. The next step would be to stabilize Wall Street. Many people sold their stocks
“The Frankfurt-based ECB awarded 489 billion euros ($645 billion) in 1134-day loans, the most ever in a single operation and more than economists' median estimate of 293 billion euros in a Bloomberg News survey. The ECB said 523 banks asked for the
Sum €X, injected into the system, is converted into an asset on Bank A's balance sheet (loan to its client) and into a liability for the debt to Bank B. On Bank B's balance sheet, its loan to Bank A is recognised as an asset and its client's deposit is
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