Mortgage Mess Liabilities Sap Banks

September 21st, 2011
in econ_news

mortgage-mess Econintersect:  The headline says "mortgage mess" and that is exactly what Bank of America (BAC) president Brian Moynihan has called the situation he and his bank find themsleves in.  Of course, he is late to the game:  Yves Smith of Naked Capitalism used the same exact words to describe the mortgage and title documentation fiasco almost a year ago in an article with that title at GEI Analysis.  Based on a Bloomberg-Businessweek report dated September 16, 2011, BAC has already recognized over $39 billion in losses related to mortgages and mortgage backed securities (MBS).  Other recognized losses mentioned in that report were $16.3 billion for JP Morgan Chase (JPM), $5.1 billion for Wells Fargo (WFC) and $3.3 billion for Ally Financial (formerly GMAC).  Ally, after receiving a $17 billion bailout is now 60% owned by the U.S. Treasury, according to Bloomberg.

Follow up:

The four institutions mentioned above have recognized losses totalling almost $64 billion to date.  Bloomberg says losses so far total $66 billion, so the implication is that no other banks have significant losses.  If that is true, it may not stay that way for long because other actions for recovery of mortgage securities losses are underway.  The largest is the action filed earlier this month by the FHFA (Federal Housing Finance Agency) for recovery of some unspecified portion of $200 billion from 17 banks, including those already mentioned, because of "materially false or misleading statements and omissions" regarding MBS the banks created and sold to government agencies, Fannie and Freddie in particular. (See GEI News.)  Other suits and settlements in progress include a settlement of complaints from states' attorney Generals over mortgage documentation fraud, that Bloomberg said might be settled for $20 billion and a suit for more than $10 billion by AIG against Bank of America.

The complaints are not about mere technicalities, according to former TARP inspector general Neil Barofsky.  From Bloomberg-Newsweek:

“You’re not talking about improperly stapling together two documents, you’re talking about systematic fraud in the system,” Neil Barofsky, the former special inspector general for the U.S. Treasury’s Troubled Asset Relief Program, said in an interview. “What this shows is that before the financial crisis, the banks were essentially lying to the purchasers of the mortgages about the quality.”

Bloomberg-Newsweek quoted a couple of authorities on where this might go:

Success by claimants could push the costs for errors and misrepresentations to more than $100 billion, said Robert Litan, a vice president of research and policy at the Kansas City, Missouri-based Kauffman Foundation.

Paul Miller, the FBR Capital Markets & Co. analyst, said costs for all banks could surpass $121 billion as the bill comes due for lax lending practices.

Litan said whatever the damages and penalties eventually paid by the banks, the amount will be trivial compared to real costs.  From Bloomberg

“There were trillions of dollars of damage.”

What do we know about where this will go?  Not much, according to the conclusion from Bloomberg:

Analysts have predicted banks will face more claims if home prices continue to decline and foreclosures keep rising. Default notices sent to overdue U.S. homeowners surged 33 percent in August from the previous month, and total foreclosure filings increased 7 percent, according to a Sept. 15 report from RealtyTrac Inc., the Irvine, California-based data seller. The increase in default notices was the biggest monthly gain in four years.

Collectively, that leaves investors with little certainty on how big the tally may become, according to Barofsky, the former TARP official and now a senior fellow and adjunct professor at the New York University School of Law.

“I don’t think anyone knows where the bottom is for all these costs,” he said.

Whatever the final costs to the banks, the burden will be a sapping drain on earnings for some time to come.  And the decline in home prices may not be over, according to Keith Jurow in a GEI Investing article today.  One ominous sign for the housing market is that foreclosures, even though slowed by legal problems are now occurring faster than previously foreclosed homes are selling.  (GEI News, yesterday.)

Sources:  Realtor MagGEI AnalysisGEI News, GEI Investing and Bloomberg-Business Week


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