JPMorgan Chase's (JPM) takeover acquisitions during the recent crisis have left it exposed to lawsuits involving some of the worst performing subprime deals such as those issued by Long Beach, WAMU and Bear Stearns. District attorneys recently dropped objections to Bank of America's (BAC) $8.5 billion mortgage settlement. As BofA's settlement draws to a close, private RMBS investors, including PIMCO and BlackRock, have pivoted and are now focused on JPM.
Mortgage repurchase claims worth over $150 billion have been filed against JPM. WAMU and Long Beach shelves are the main contributors. In its quarterly filings, JPM disclosed over $170 billion in putback litigation lawsuits. Loss amounts would be less than the disputed amounts as some proceeds would be recouped from the sale of foreclosed properties. JPM reports severities, loss given defaults, are at 60% for loans it repurchased from the GSEs.
Takeaway: JPMorgan could lose tens of billions in private RMBS repurchases.
Uneasy lies the head that wears a crown
RMBS bond holders appear to be targeting deals issued by JPM or one of its acquisitions - with over $2 trillion in assets JPM has the resources to cut a fat check. However, JPM putback success ratio for private MBS deals is one of the lowest in the industry. Nomura, ResCap and BofA have been more willing to settle with bond investors. JPM claims the FDIC if responsible for WAMU repurchases and in its 2013 Q1 quarterly filing tries to make a clear demarcation between repurchase claims from GSE trusts and those from private MBS trusts -
From 2005 to 2008, the Firm and certain acquired entities made certain loan level representations and warranties in connection with approximately $450 billion of residential mortgage loans that were sold or deposited into private-label securitizations. While the terms of the securitization transactions vary, they generally differ from loan sales to the GSEs in that, among other things: (I) in order to direct the trustee to investigate potential claims, the security holders must make a formal request for the trustee to do so, and typically, this requires agreement of the holders of a specified percentage of the outstanding securities; (ii) generally, the mortgage loans are not required to meet all GSE eligibility criteria; and (III) in many cases, the party demanding repurchase is required to demonstrate that a loan-level breach of a representation or warranty has materially and adversely affected the value of the loan
Point in the previous quote is redundant as we now know bondholders have successfully directed the trustee to file claims for over $150 billion of deals.
Takeaway: JPM, king of wall-street, is now the primary target for mortgage putbacks.
JPM's quarterly filings disclose reserves for private RMBS as part of its litigation reserves, which are relatively puny. The key question is would JPM be forced to take a loss similar to the $14 billion hit BofA took in 2011-Q2, when it announced its mortgage settlement proposal?
Takeaway: JPM's puny reserves have left its stock price vulnerable to adverse litigation rulings or payouts in putback settlements.
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Trust but verify: Bond Level Data
Investors can keep tabs of repurchase claims by reading court filings or ABS-15G reports on individual bonds at the SEC's Edgar website. Below we show the data for one sample bond, BSABS 2006-AQ1
JPMorgan has become the focal point of mortgage repurchase litigation and has one the lowest private RMBS repurchase reserves in the industry. This combination leaves JPMorgan's equity investors facing significant event risk. Investors who are currently long JPM stock could hedge this jump risk with out of the money put options or call options in stocks of companies that would benefit from putbacks like MBIA (MBI) and Assured Guaranty (AGO).
Note: See all charts here.