Although the nation’s big banks have already incurred more than $100 billion in costs for repurchases and mortgage-related litigation, more such expense could be ahead. But the group should be able to withstand the hit.
Since 2009, more than $45 billion has been paid or set aside by the largest U.S. banks to cover breaches of representation and warranty on residential loans they originated or securitized between 2005 and 2008.
The banks include Bank of America Corp., Citigroup Inc., Goldman Sachs & Co., JPMorgan Chase & Co., Morgan Stanley & Co. LLC and Wells Fargo & Co.
In addition, according to a report this week from Standard & Poor’s Ratings Services, the group has collectively incurred around $50 billion in legal expenses related to the 2005 through 2008 vintages.
Those amounts are over and above the approximately $30 billion in expenses and mortgage relief to settle mortgage servicing issues.
S&P estimates that reserves for legal and representation and warranty at the six banks is around $60 billion.
“We estimate that the largest banks may need to pay out an additional $55 billion to $105 billion to settle mortgage-related issues, some of which is already accounted for in these reserves,” the report said. “We acknowledge that our estimated range contains a significant amount of simplifying assumptions, so it could prove too conservative or too lenient.”
S&P estimates that the banks have an aggregate buffer of $155 billion — including capital cushion, representation and warranty reserves, and estimated legal reserves — to absorb losses from a range of additional mortgage-related and other legal exposures.
Although reserves for mortgage-backed securities claims by Fannie Mae and Freddie Mac are mostly sufficient, S&P said the reserves for private-label MBS might be inadequate at some banks. There are more hurdles for private-label investors to overcome, and the claims will take longer to materialize than those from Fannie and Freddie
Other RMBS exposure includes additional settlements with the Federal Housing Finance Agency and monoline insurers.
The ratings agency cautioned that an immediate and unexpected significant legal expense could weaken a bank’s business model through the loss of key clients and employees in addition to the weakening of its capital position.
S&P highlighted how mortgage-litigation has recently accelerated beyond investor claims as the Department of Justice invokes the civil money provision of the Financial Reform, Recovery and Enforcement Act of 1989. The Justice Department is focusing on misconduct during the period leading up to the financial crisis covering a variety of issues, including securities fraud and poor lending practices.
“Estimating U.S. banks’ remaining exposures to the DOJ and quantifying remaining unsettled items are difficult,” S&P stated. “In addition to the DOJ, state attorneys general are also bringing forth lawsuits regarding defective loans packaged in mortgage-backed securities. Banks could also be subject to fines related to mortgage-backed securities or other issues.”
Also haunting banks are non-mortgage issues such as the LIBOR scandal, foreign currency exchange rate collusion and physical commodities issues.
