As fellow Fool and Financials Bureau Chief Matt Koppenheffer so succinctly put it to me yesterday: "What's up US Bancorp (NYSE: USB ) ?" This typically non-scary bank just received news that the Federal Home Loan Mortgage Corporation, better known as Freddie Mac (NASDAQOTCBB: FMCC ) , is going to be sending more soured mortgages its way.
Put up or putback
US Bancorp chairman and CEO Richard Davis broke the news to investors on Tuesday. Both Freddie and Fannie Mae (NASDAQOTCBB: FNMA ) , the country's other government-run mortgage lender, make it a practice to return what they consider bad mortgages to the banks that originated them. Bad mortgages, by their definition, are loans not underwritten per Freddie or Fannie standards.
According to The Wall Street Journal, Freddie told US Bancorp last Friday that it would start receiving putbacks, as returned mortgages are called, for mortgages originated as far back as 2004 and 2005. Up to now, mortgages have typically only been returned for those originated in 2006 and 2007, the two years generally recognized as having been the worst for underwriting standards.
"That was unexpected." So said Davis in regard to the news. Indeed it is. We're used to hearing this sort of thing about Bank of America (NYSE: BAC ) , and even Wells Fargo (NYSE: WFC ) , but not no-drama US Bancorp. So what does it mean for investors?
The bank has less cash on its balance sheet versus debt than I'd like to see, $11 billion versus $55 billion respectively, but it has a return on equity of 14.7%, year-over-year revenue growth of 10.3%, and year-over-year earnings growth of 15.8%: all great numbers. And it's already adding to its reserves for the express purpose of handling an increased amount of mortgage putbacks. According to Davis, this will cut $0.01 to $0.02 off the bank's earnings per share -- not exactly a big deal.
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