Major banks were bailed out during the financial crisis of 2008. Ever since then, they have been scrambling to avoid financial responsibility for their imprudent lending practices that precipitated the crisis. The banks entered into a large settlement with the attorneys general across the country to ostensibly pay restitution for their shoddy paperwork and foreclosure practices, but that was not the end to the pain for their misdeeds. Now, a series of both public and private entities are suing them for fraud, duping investors, and lax underwriting standards.
I hope they lose.
They deserve to lose. The banks must bear the full brunt of their mistakes, or they will almost certainly repeat them.
By JESSICA SILVER-GREENBERG — Published: December 9, 2012
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.
Banks are guilty on all three counts. They should be facing numerous legal hassles for their bad behavior.
“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 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.
Lenders are trying to abdicate all responsibility for their so-called legacy loans. It’s as if the entire housing bubble period was some unaccountable free-for all and they should be absolved for all responsibility for their shoddy lending practices. I hope these lawsuits drain them of their profits and cause executives to lose jobs or at least lose bonuses.
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.
Out of self preservation the banks need to negotiate another broad settlement over their bad loans. We can only hope the federal negotiators protect the taxpayers in the final agreement.
“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.”
I get warm feelings from that.
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. …
JPMorgan Chase and Credit Suisse, for example, agreed last month 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 from Fannie Mae and Freddie Mac, and $1.6 billion to Assured Guaranty, which insured the shaky mortgage bonds.
Mozilo walked away with millions, and others have to pay the bills.
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.
I suppose we will take their money and give it back to them in a bailout.
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 last month of perpetrating an $11.2 billion fraud by deceiving investors into buying shoddy mortgage-backed securities. …
“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. …
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.
The banks deserve no mercy. Whatever money doesn’t go toward write downs should go to the government and other parties who relied on lenders to be responsible. Perhaps investors were just as stupid for believing the banks, and they deserve the pain they are experiencing, but many investors relied on the banks to do their jobs as prudent lenders. When the banks abdicated their responsibility for maintaining prudent lending standards to ensure their loans were repaid, they earned the losses from lawsuits and buybacks. My only worry is that banks will receive another blank check from the US taxpayer to bail them out once again.
Loaning money to obvious Ponzis
When an underwriter looks at a borrowers history, it’s fairly easy to tell when a borrow has gone Ponzi. It doesn’t take elaborate analysis to spot a pattern of ever-increasing debt. If lenders had bothered to filter for this behavior, many bubble loans — the loans on which the banks are being sued — would never have been made.
- The former owners of today’s featured REO paid $1,172,500 on 12/22/2000. They used a $820,000 first mortgage, a $117,200 second mortgage, and a $235,300 down payment.
- On 9/26/2001 they refinanced with a $927,500 first mortgage and a $198,700 stand-alone second. This effectively withdrew their down payment.
- On 6/20/2002 they refinanced with a $1,000,000 first mortgage, a $250,000 stand-alone second, and obtained a $250,000 HELOC.
- On 5/13/2004 they refinanced with a $980,000 first mortgage. Apparently, they paid down their mortgage at that time.
- On 3/7/2006 they opened a $749,000 HELOC.
- On 1/30/2007 they opened a $1,000,000 HELOC… A $1,000,000 HELOC.
- They defaulted and were served notice on 7/7/2011. They were allowed to squat in their mansion for over a year before the bank bought it at auction for $1,801,000, the full amount on the deed.
Union Bank was pretty stupid.
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Proprietary OC Housing News home purchase analysis
$2,050,000 …….. Asking Price
$1,172,500 ………. Purchase Price
12/22/2000 ………. Purchase Date
$877,500 ………. Gross Gain (Loss)
($164,000) ………… Commissions and Costs at 8%
$713,500 ………. Net Gain (Loss)
74.8% ………. Gross Percent Change
60.9% ………. Net Percent Change
4.7% ………… Annual Appreciation
Cost of Home Ownership
$2,050,000 …….. Asking Price
$410,000 ………… 20% Down Conventional
3.86% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,640,000 …….. Mortgage
$411,367 ………. Income Requirement
$7,698 ………… Monthly Mortgage Payment
$1,777 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$513 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$640 ………… Homeowners Association Fees
$10,627 ………. Monthly Cash Outlays
($1,398) ………. Tax Savings
($2,422) ………. Equity Hidden in Payment
$538 ………….. Lost Income to Down Payment
$276 ………….. Maintenance and Replacement Reserves
$7,620 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$22,000 ………… Furnishing and Move In at 1% + $1,500
$22,000 ………… Closing Costs at 1% + $1,500
$16,400 ………… Interest Points
$410,000 ………… Down Payment
$470,400 ………. Total Cash Costs
$116,800 ………. Emergency Cash Reserves
$587,200 ………. Total Savings Needed