Bank Mortgage Loss Math Doesn't Add Up

For all the doomsday predictions out there on Bank of America's (BAC) likely losses from mortgage-related problems, there is still only one sell-side analyst with an underperforming rating on the stock, according to Thomson Reuters.

Analysts appear to prefer staying on the fence on the stock because, for all the number crunching they do, they know that there is really no sure way of knowing what the losses could be.

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And after being proved wrong a couple of quarters, their confidence in their own estimates has likely been shaken.

Paul Miller, analyst at FBR Capital Markets, originally estimated the industry would recognize $54 billion to $106 billion of losses from mortgage repurchase claims, with the top four banks incurring 40% of those losses.

But after taking into account the last three quarters of results, the analyst now estimate $121 billion in industry-wide losses, with 60% of these losses incurred by the top four banks -- Bank of America, JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC).

"But does anyone really know?" he asks rhetorically in his note publishing the latest estimates.

Analysts remain uncertain of just how many more repurchase claims remain unresolved. They are also only left guessing about the severity of the remaining losses.

"The confidence level in this stuff is really lacking," Miller told TheStreet. "We can put numbers to paper. But if you take your assumption of loss rates from 1% of unpaid principal balances (or UPB) to 2% -- it looks like a small move -- but the numbers become very large."

Miller's latest estimates put Bank of America's total losses from repurchase claims at $40 billion, of which $26 billion has already been charged off or reserved. But his estimate would change rather dramatically if Bank of America's $8.5 billion settlement, which is currently in dispute, is thrown out or if he assumes more severe loss rates on remaining repurchase claims.

"The total loss rate implied by the settlement is 2.0% of UPB, or 8.0% of principal at-risk. This loss rate seems reasonable given the severity of losses we have seen in other private-label repurchase settlements," wrote Miller. "However, if Bank of America were to incur the upper end of losses, we believe losses would be capped at $66 billion, or $43 billion after tax, assuming 60% success rate on claims and 50% severity on delinquencies. This compares to our current estimate of $26 billion of total private-label repurchase losses."