Big Banks Face Impairment Risk.(Brief Article)

Commercial banks could see significant mortgage servicing impairments and writedowns during the third quarter, according to a report from U.S. Bancorp Piper Jaffray titled "A Look At Mortgage Refinancing Risk."

Those most likely to be affected, according to senior research analyst Andrew B. Collins, are Wells Fargo, J.P. Morgan Chase, Bank of America and Citigroup.

"Nevertheless, on a positive note, originations were at record levels at the end of July and have only accelerated since then.

"Further, we think these banks have adequately hedged their servicing portfolios," he said.

Bank stocks have come under pricing pressure, which Mr. Collins blames on "exaggerated consumer concerns related to an increase in prepayments/refinancing on residential home mortgages."

There could be some net interest margin pressure during the third and fourth quarter as a result of prepayments cutting into returns from the mortgage-backed security portfolio and residential mortgage loan portfolio. But, he said, there should have a negligible effect on the commercial banks as they can diversify into other attractive ...