Mortgage Rates Costs Banks $66 Billion

According to a tally by Bloomberg News, faulty mortgages and foreclosure abuses have cost America’s five biggest home lenders over $65.7 billion. Newer findings reveal it may be twice that. Paul Miller, the FBR Capital Markets & Co. analysts, claims that as the bill comes due for lenient lending practices, the costs for all banks could surpass $121 billion. Former special inspector general for the U.S. Treasury’s Trouble Asset Relief Program, Neil Barofsky, stated in an interview that “before the financial crisis, the banks were essentially lying to the purchasers of the mortgages about the quality.”

The tally consisted of company statements, financial presentations, and regulatory fillings by the previously mentioned five biggest mortgage lenders. The findings include foreclosure errors and abuses, payments to reimburse investors for lost value on faulty mortgages, expenses attributable to repurchases, litigation expenses and legal settlements. It also includes writedowns of assets, such as mortgage servicing rights, when the company blamed its value’s loss on mortgage underwriting issues or foreclosures and remedy costs. As more detailed breakdowns become available an increase in these figures may appear.

Guarantees that had been initially offered were that after making home loans banks bundled them into securities and sold them to private investors and government-backed enterprises, offering “representations and warranties” promising to buy back mortgages or cover losses if loans were inaccurate or missing data on certain criteria.

The Federal Housing Finance Agency’s Sept. 2 lawsuit against 17 firms for possible defects in $196 billion of mortgage securities bought by Fannie Mae and Freddie Mac may boost the total costs. Following government takeovers in the 2008 credit crisis, FHFA became the conservator for Fannie Mae and Freddie Mac. Citing the prospectus for one mortgage-backed security underwritten by Bank of America entities, FHFA states that loans were not to be larger than the underlying value of the homes. However, only 11 percent of loans fit that description. In addition, another securitization said 4.45 percent of homes were not owner-occupied but according to the suit the true percentage was 15.27 percent. Fannie Mae and Freddi Mac, on the other hand, claim that their losses in the mortgage-backed securities market were due to the housing prices downturn and other economic factors.

In regards to foreclosures, banks are negotiating a possible $20 billion settlement with state attorneys general. They are being investigated to see if they relied on inaccurate, inadequate or missing documents to confiscate homes. Robert Litan, a vice president of research and policy at Kauffman Foundation, says that costs for errors and misrepresentations could be pushed to more than $100 billion if the claimants are successful.

According to Peter Swire, a law professor at Ohio State University, “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.”

If home prices keep declining and foreclosures rising, analysts predict banks will face more claims. According to the Sept. 15 RealtyTrac Inc. report, default notices sent have gone up by 33 percent from July to August-being the biggest monthly gain in four years-while total foreclosure fillings increase 7 percent.

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