Yes, that's sarcasm:
The mortgage firms are looking at every loan more than 90 days past due and “asking us basically to give them all the documentation to show that it was properly underwritten,” JPMorgan’s Scharf said. “We then go through a process with them that takes a period of time, and literally it’s every loan, loan-by-loan, and have the discussion on whether or not we actually should buy the loan back.”
That's exactly what I said would happen more than two years ago.
EVERY LOAN.
If there was appraisal fraud OR
If there was income fraud OR
If there was DTI fraud OR
If the automated underwriting was gamed OR
If there was asset fraud
THEN the bank gets rammed with a repurchase demand on the bad paper - paper that is 90 days+ and, in essentially every case, dramatically underwater.
The "dream" that this will result in "only" $7 billion in losses (30% of the repurchased amount) is a fantasy.
The most common include inflated appraisals or falsely stated incomes in the loan applications, said Larry Platt, a Washington-based partner at law firm K&L Gates LLP who specializes in mortgage-purchase agreements. The government agencies hire their own reviewers who go back and compare the appraisals with prices from historical home sales, he said.
Ding ding ding ding ding ding.
The truly ugly news isn't found in these mortgages. It is found in the second lines - HELOCs and "Silent Seconds" - that are behind these agency mortgages. Those are worth zero once the first defaults, and when the repurchase demand is perfected the auditors are going to force these loans to be recorded at their likely recovery value - which is zero.
There are literal hundreds of billions of dollars worth of that trash on all of the big banks balance sheets, and all of it is being carried under assumptions that nearly every one of those loans is "money good."
That assumption is blatantly and intentionally false.
Oh, JP Morgan's net income for all of 2009? $11.7 billion.
They recorded $1.6 billion last year for this "expense", and I'm willing to bet that it's double that or more for the coming year, not to mention the impairment or outright write-off of the seconds.
That would be roughly 20% of their net earnings - not exactly an immaterial amount of money.
PS: $21 billion is tiny compared to the tsunami headed these folks' direction. In the end every piece of this bad paper is going to head back to the securitizers and originators. All of it - and all of the seconds behind that paper is going to wind up marked to zero, because it is subordinate to an underwater first. It is simply a matter of time before the people who hold these RMBS and the more complex securities structured on top of them decide to come after the banks and, to the extent that they can prove malfeasance or misfeasance, these banks will eat it.
###