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[Art Deco]

 [image: The New York Times] <http://www.nytimes.com/>

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December 9, 2012
Mortgage Crisis Presents a New Reckoning to Banks By JESSICA
SILVER-GREENBERG<http://topics.nytimes.com/top/reference/timestopics/people/s/jessica_silvergreenberg/index.html>

The nation’s largest banks are facing a fresh torrent of lawsuits asserting
that they sold shoddy mortgage securities that imploded during the
financial crisis, potentially adding significantly to the tens of billions
of dollars the banks have already paid to settle other cases.

Regulators, prosecutors, investors and insurers have filed dozens of new
claims against Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and
others, related to more than $1 trillion worth of securities backed by
residential mortgages.

Estimates of potential costs from these cases vary widely, but some in the
banking industry fear they could reach $300 billion if the institutions
lose all of the litigation. Depending on the final price tag, the costs
could lower profits and slow the economic recovery by weakening the banks’
ability to lend just as the housing market is showing signs of life.

The banks are battling on three fronts: with prosecutors who accuse them of
fraud, with regulators who claim that they duped investors into buying bad
mortgage securities, and with investors seeking to force them to buy back
the soured loans.

“We are at an all-time high for this mortgage litigation,” said Christopher
J. Willis, a lawyer with Ballard Spahr, which handles securities and
consumer litigation.

Efforts by the banks to limit their losses could depend on the outcome of
one of the highest-stakes lawsuits to date — the $200 billion
case<http://www.nytimes.com/2011/09/03/business/bank-suits-over-mortgages-are-filed.html>that
the Federal Housing Finance Agency, which oversees the housing twins
Fannie Mae and Freddie Mac, filed against 17 banks last year, claiming that
they duped the mortgage finance giants into buying shaky securities.

Last month, lawyers for some of the nation’s largest banks descended on a
federal appeals court in Manhattan to make their case that the agency had
waited too long to sue. A favorable ruling could overturn a decision by
Judge Denise L. Cote, who is presiding over the litigation and has so far
rejected virtually every defense raised by the banks, and would be cheered
in bank boardrooms. It could also allow the banks to avoid federal housing
regulators’ claims.

At the same time, though, some major banks are hoping to reach a broad
settlement with housing agency officials, according to several people with
knowledge of the talks. Although the negotiations are at a very tentative
stage, the banks are broaching a potential cease-fire.

As the housing market and the nation’s economy slowly recover from the 2008
financial crisis, Wall Street is vulnerable on several fronts, including
tighter regulations assembled in the aftermath of the crisis and continuing
investigations into possible rigging of a major international interest
rate<http://topics.nytimes.com/top/reference/timestopics/subjects/l/london_interbank_offered_rate_libor/index.html?8qa>.
But the mortgage lawsuits could be the most devastating and expensive
threat, bank analysts say.

“All of Wall Street has essentially refused to deal with the real costs of
the litigation that they are up against,” said Christopher Whalen, a senior
managing director at Tangent Capital Partners. “The real price tag is
terrifying.”

Anticipating painful costs from mortgage litigation, the five major sellers
of mortgage-backed securities set aside $22.5 billion as of June 30 just to
cushion themselves against demands that they repurchase soured loans from
trusts, according to an analysis by Natoma Partners.

But in the most extreme situation, the litigation could empty even more
well-stocked reserves and weigh down profits as the banks are forced to pay
penance for the subprime housing crisis, according to several senior
officials in the industry.

There is no industrywide tally of how much banks have paid since the
financial crisis to put the mortgage litigation behind them, but analysts
say that future settlements will dwarf the payouts so far. That is because
banks, for the most part, have settled only a small fraction of the
lawsuits against them.

JPMorgan Chase and Credit Suisse, for example, agreed last
month<http://www.nytimes.com/2012/11/17/business/jpmorgan-and-credit-suisse-to-pay-417-million-in-mortgage-settlement.html>to
settle mortgage securities cases with the Securities and Exchange
Commission for $417 million, but still face billions of dollars in
outstanding claims.

Bank of America is in the most precarious position, analysts say, in part
because of its acquisition of the troubled subprime lender Countrywide
Financial.

Last year, Bank of America paid $2.5 billion to repurchase troubled
mortgages<http://dealbook.nytimes.com/2011/01/03/fannie-and-freddie-continue-to-collect-on-bad-loans/>from
Fannie Mae and Freddie Mac, and $1.6 billion to
Assured Guaranty<http://dealbook.nytimes.com/2011/04/15/bank-of-americas-legal-woes/>,
which insured the shaky mortgage bonds.

But in October, federal prosecutors in New York accused the
bank<http://dealbook.nytimes.com/2012/10/24/federal-prosecutors-sue-bank-of-america-over-mortgage-program/>of
perpetrating a fraud through Countrywide by churning out loans at such
a
fast pace that controls were largely ignored. A settlement in that case
could reach well beyond $1 billion because the Justice Department sued the
bank under a law that could allow roughly triple the damages incurred by
taxpayers.

Bank of America’s attempts to resolve some mortgage litigation with an
umbrella settlement have stalled. In June 2011, the bank agreed to pay $8.5
billion<http://www.nytimes.com/2011/06/30/business/30mortgage.html?pagewanted=all>to
appease investors, including the Federal Reserve Bank of New York and
Pimco, that lost billions of dollars when the mortgage securities assembled
by the bank went bad. But the settlement is in limbo after being
challenged<http://dealbook.nytimes.com/2011/08/30/homeowners-seek-to-block-bank-of-america-settlement/>by
investors. Kathy D. Patrick, the lawyer representing investors, has
said
she will set her sights on Morgan Stanley and Wells Fargo next.

Of the more than $1 trillion in troubled mortgage-backed securities
remaining, Bank of America has more than $417 billion from Countrywide
alone, according to an analysis of lawsuits and company filings. The bank
does not disclose the volume of its mortgage litigation reserves.

“We have resolved many Countrywide mortgage-related matters, established
large reserves to address these issues and identified a range of possible
losses beyond those reserves, which we believe adequately addresses our
exposures,” said Lawrence Grayson, a spokesman for Bank of America.

Adding to the legal fracas, New York’s attorney general, Eric T.
Schneiderman, accused Credit
Suisse<http://www.nytimes.com/2012/11/21/business/new-york-sues-credit-suisse-over-mortgage-backed-securities.html>last
month of perpetrating an $11.2 billion fraud by deceiving investors
into buying shoddy mortgage-backed securities. According to the complaint,
the bank dismissed flaws in the loans packaged into securities even while
assuring investors that the quality was sound. The bank disputes the
claims.

“We need real accountability for the illegal and deceptive conduct in the
creation of the housing bubble in order to bring justice for New York’s
homeowners and investors,” Mr. Schneiderman said.

It is the second time that Mr. Schneiderman — who is also co-chairman of
the Residential Mortgage-Backed Securities Working Group, created by
President Obama in January — has taken aim at Wall Street for problems
related to the subprime mortgage morass. In October, he filed a civil
suit<http://www.nytimes.com/2012/10/02/business/suit-accuses-jpmorgan-unit-of-broad-misconduct-on-mortgage-securities.html>in
New York State Supreme Court against Bear Stearns & Company, which
JPMorgan Chase bought in 2008. The complaint claims that Bear Stearns and
its lending unit harmed investors who bought mortgage securities put
together from 2005 through 2007. JPMorgan denies the allegations. Another
potentially costly prospect for the banks are the demands from a number of
private investors who want the banks to buy back securities that violated
representations and warranties vouching for the loans.

JPMorgan Chase told investors that as of the second quarter of this year,
it was contending with more than $3.5 billion in repurchase demands. In the
same quarter, it received more than $1.5 billion in fresh demands. Bank of
America reported that as of the second quarter, it was dealing with more
than $22 billion in unresolved demands, more than $8 billion of which were
received during that quarter.


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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