It was a little frustrating when mainstream media started using the term “put-back” risk instead of repurchase risk to describe the potential for Fannie Mae, Freddie Mac, the Federal Home Loan Banks and others to force banks to buy back mortgage securities and other loans that didn’t meet original warranty and representation commitments.
It’s not an easy issue to understand. And it was conflated with the realization that banks were foreclosing on homeowners without following due process, without having legal title, without following the law. John Carney, who runs CNBC’s blog NetNet, explains the problem that occurs when too many issues have to be explained in too short a time, to too many people who have too little patience for details:
There’s a lot of confusion about why fears of put-back exposure at some of our largest banks seemed to spring up so quickly following the revelations about problems in foreclosure proceedings.
Conceptually, these are two different problems. Banks using robo-signers who were fraudulently claiming to have reviewed loan documents has no necessary connection to the idea that purchasers of mortgage-backed securities may have the right to force banks to buy them back.
But the two problems were linked by a common thread: concern that the fraudulent foreclosure practices were a cover-up for a deeper problem in identifying and documenting the ownership of many mortgages…So that was how we got from the foreclosure fiasco to the put-back panic. Now, of course, we’ve discovered that there are many more sources of put back liability than just missing assignments. But those missing assignments are what got the ball rolling.
Foreclosuregate does not have a direct relationship to auditors other than forcing them to make sure banks and other financial services companies like mortgage servicers make more and better disclosures than in the past.
Interestingly enough – and I say this risking the possibility it may sound conceited – I think the SEC is paying attention to what I’ve been saying. I challenged the SEC at the end of September to look at the banks’ disclosures regarding repurchase risk and other contingencies:
Bank of American admits “representations and warranties expense” as well as losses of $1.5 billion for repurchases of loans from first lien securitization trusts under their representations and warranties and corporate guarantees. In addition, they’d already repurchased an additional $13.1 billion based on mods, delinquencies and other “clean-up”.
However, I can’t easily see anywhere in either bank what the actual reserves are for estimated future liabilities and how they come up with a number given the total loans sold by type and the current claims by various parties. I think it’s time for someone, perhaps the SEC, to demand more detailed disclosure about reserves for repurchase risk.
That should be easy, in particular, for JPM, BAC, Goldman Sachs, AIG, and Barclays for claims against them by the Federal Home Loan Banks (FHLB) and Freddie Mac. That’s because PwC is on both sides of the equation, as auditor for all of these banks and AIG and as auditor of Freddie Mac and all twelve of the FHLB.
The SEC has now issued a “Dear CFO” letter strongly encouraging issuers to make sure disclosures are clear and sufficient. Edith Orenstein explains it all for you at the Financial Executives International blog:
The SEC’s ‘Dear CFO’ letter sent to public companies in October, 2010, posted on the SEC’s website October 29, addresses “Accounting and Disclosure Issues Related to Potential Risks and Costs Associated with Mortgage and Foreclosure-Related Activities or Exposures.”
Letter Lists Specific Disclosures ‘To Be Considered’
Issued by staff of the SEC’s Division of Corporation Finance, the October 29 ‘Dear CFO letter’ contains a lengthy list of specific disclosures that “should be considered” in connection with mortgage (and mortgage securitization and sale-related) and foreclosure related activities…
John Carney at CNBC NetNet has now gone back to repurchase risk, and tied it all together in a bow for us. In particular, he mentions Citigroup and Bank of America and has given me credit for having been on KPMG’s case for a while:
As my colleague Ash Bennington and I have explained at length, we think that the historical size of claims and payouts may not be a good guide to future claims and payouts…To put it differently, it’s as if we’ve made all sorts of new discoveries about the territory but Citi insists on pointing at an old map.
Where does the confidence in the map come from? It could be that Citi is taking assurance from the work of its auditors, KPMG. But this assurance could be misleading. As Francine McKenna of the blog Re:TheAuditors points out, KPMG has a long history of approving poor disclosures when it comes to repurchase risk.
McKenna first reported on poor disclosures at a KPMG audited company in 2007. That company was New Century. It hadn’t disclosed anything about repurchase risk in earlier filings with the Securities and Exchange Commission. But, suddenly, it was revealing that banks were demanding that it buy back mortgages it had sold. If all the mortgages were put back to the company, New Century said it would be on the hook for $8.4 billion.
Later, in an article for Business Insider, McKenna reported that Wells Fargo was not reporting the quantity and quality of its repurchase risk.