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Sat 17 Sep 2011 03:21 PM

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Mortgage debacle costs US banks $66bn

Bad home loans at nation’s five biggest home lenders may reach double that amount

Mortgage debacle costs US banks $66bn
Analysts have predicted banks will face more claims if home prices continue to decline and foreclosures keep rising

Faulty mortgages and foreclosure abuses have cost the
nation’s five biggest home lenders at least $65.7bn, according to a tally by
Bloomberg News* and new claims may push the industry-wide total to twice that

Bank of America Corp (BAC), the largest US lender, had the
biggest costs, totaling $39.1bn since the start of 2007. JPMorgan Chase &
Co (JPM), ranked second by assets, followed with $16.3bn, and Wells Fargo &
Co (WFC), the biggest US home lender, had $5.09bn, the data show.

The costs have eclipsed predictions from bankers and analysts
that lenders would suffer only modest damage from what Bank of America Chief
Executive Officer Brian T. Moynihan has called “the mortgage mess.” Paul
Miller, the FBR Capital Markets & Co analyst, said costs for all banks
could surpass $121bn as the bill comes due for lax lending practices.

“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 US 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

Miller, a former bank examiner, previously said costs might
range from $54bn to $106bn for the banking industry. Under his new $121bn estimate,
which covers only repurchase costs, Bank of America, Wells Fargo, JPMorgan and
Ally Financial Inc will bear 60 percent of the burden, with Bank of America
alone paying 33 percent.

Ally, previously known as GMAC Inc, has been hit with
$3.28bn in costs. The Detroit-based financer of auto loans and leases lost
$10.3bn in 2009 and required a government bailout totaling more than $17bn,
largely due to losses from its Residential Capital mortgage unit. Ally is now
74 percent owned by the US Treasury Department.

Costs at Citigroup Inc, ranked third by assets among US
lenders, totaled $1.9bn. The New York-based lender needed a $45bn bailout as
bad bets on subprime loans drove the company to post a 2008 net loss of $27.7bn.
The bailout has since been repaid.

“We have been diligent in settling claims related to the
mortgage business, where appropriate,” said Gina Proia, a spokeswoman for Ally.
“We believe we are appropriately reserved based on what we know today and what
we are able to estimate.”

Shannon Bell at Citigroup, Thomas Kelly at JPMorgan and
Richele Messick at Wells Fargo declined to comment on the data.

Most of Bank of America’s costs have been tied to mortgages
written by Countrywide Financial Corp, the leading subprime lender, which Bank
of America rescued from collapse in 2008.

“The reserves that we have established are part of the
effort to address legacy and Countrywide issues and put them behind us,” said
Jerry Dubrowski, a Bank of America spokesman.

Banks typically made home loans and bundled them into
securities sold to private investors and government-backed enterprises. They
usually offered “representations and warranties” in which lenders promised to
buy back the mortgages or cover losses if the loans turned out to be based on
inaccurate or missing data on criteria such as the borrower’s income, the
property’s value or whether it would be used as a primary residence.

“The impact of the reps and warranties was completely
underestimated for a long time,” said Laurie Goodman, a senior managing
director at Amherst Securities Group LP in New York who specializes in
mortgage-backed securities. “It’s not anymore.”

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Actions that may boost the total costs include the Federal
Housing Finance Agency’s Sept 2 lawsuit against 17 firms, which cited possible
defects in $196bn of mortgage securities bought by Fannie Mae and Freddie Mac.
FHFA became the conservator for Fannie Mae and Freddie Mac following government
takeovers in the 2008 credit crisis.

Last month, American International Group Inc. (AIG) filed a
suit against Bank of America for more than $10bn, alleging fraud. The bank
denied AIG’s allegation and blamed the New York- based insurer for the

“AIG recklessly chased high yields and profits throughout
the mortgage and structured finance markets,” said Larry DiRita, a Bank of
America spokesman. “It is the very definition of an informed, seasoned
investor, with losses solely attributable to its own excesses and errors.”

As for foreclosures, banks are negotiating a settlement with
state attorneys general that may be valued at $20bn. All 50 states are
investigating whether banks relied on inaccurate, inadequate or missing
documents to seize homes.

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

 “As large as that
number is, it’s a small fraction of the overall economic damage that the crisis
and these mortgages caused to the economy,” said Litan, who was on a commission
that investigated the savings and loan crisis in the 1980s. “There were trillions
of dollars of damage.”

The FHFA lawsuit cited the prospectus for one mortgage-
backed security underwritten by Bank of America entities, which said no loans
were larger than the underlying value of the homes. In fact, 11 percent of
loans sampled by the agency fit that description, the suit said. Another
securitization said 4.45 percent of the homes weren’t owner-occupied, while the
true percentage was 15.27 percent, according to the suit.

Fannie Mae and Freddie Mac “acknowledged that their losses in
the mortgaged-backed securities market were due to the unprecedented downturn
in housing prices and other economic factors,” said DiRita at Bank of America.

The industry-wide errors “were not minor slip-ups,” said
Peter Swire, a law professor at Ohio State University in Columbus, Ohio, and
until last year a special assistant to President Barack Obama for economic
policy. “Our biggest banks were talking homeowners into taking some of these
bad loans at the front end and then dumping fraudulent loans on investors at
the back end.”

Moynihan at Bank of America has said the lender will sell
some of its contracts to handle billings, collections and foreclosures on home
loans, and JPMorgan will reduce its remaining mortgage portfolio “until it’s
close to zero,” chief executive officer Jamie Dimon told analysts on a July 14
conference call.

JPMorgan liabilities could swell if it’s forced to bear the
cost of bad loans made by Washington Mutual Inc, according to the bank’s
regulatory filings. JPMorgan acquired most of WaMu’s assets from the Federal
Deposit Insurance Corp. in 2008 after the Seattle-based company became the
biggest bank to fail in US history.

WaMu sold securitized mortgages to investors that might be
subject to repurchase demands, according to JPMorgan. While the bank contends
the FDIC would be responsible for the costs, the agency contested that position
and the dispute hasn’t been resolved, according to a July 14 JPMorgan

Analysts have predicted banks will face more claims if home
prices continue to decline and foreclosures keep rising. Default notices sent
to overdue US 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.

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*Bloomberg’s tally was compiled from regulatory filings,
company statements and financial presentations by the nation’s five biggest
mortgage lenders. The data cover provisions and expenses attributable to
repurchases, foreclosure errors and abuses, payments to reimburse investors for
lost value on faulty mortgages, legal settlements and litigation expenses.

The compilation also includes writedowns of assets, such as
mortgage servicing rights, when the company attributed the loss in value to
problems in mortgage underwriting or foreclosures and the costs of remedies.
The figures may increase as more detailed breakdowns become available.