Bloomberg News

Wells Fargo Faces Scrutiny by Investors on Mortgage Bonds

January 06, 2012

(Updates with number of trusts, analyst’s comment starting in the second paragraph.)

Jan. 5 (Bloomberg) -- A bondholder group that won an $8.5 billion settlement from Bank of America Corp. on securities backed by soured home loans may also seek payments from Wells Fargo & Co., the nation’s biggest mortgage lender.

The law firm Gibbs & Bruns LLP said in a statement today it’s seeking information on pools securing more than $19 billion of residential mortgage-backed securities issued by affiliates of Wells Fargo. The firm represents clients holding more than 25 percent of the voting rights in 48 bond trusts that issued the securities, according to the statement.

Faulty mortgages and foreclosures have cost the five largest U.S. home lenders about $70 billion since the start of 2007 and helped drive down shares of Charlotte, North Carolina- based Bank of America by almost 60 percent in the past 12 months. Gibbs & Bruns said last month it may also seek reimbursements from JPMorgan Chase & Co., the biggest and most profitable U.S. bank.

“Our clients continue to seek a comprehensive solution to the problems of ineligible mortgages in RMBS pools and deficient servicing of those loans,” Kathy Patrick, the Houston-based law firm’s lead counsel on the case, said in the statement. Mary Eshet, a spokeswoman for San Francisco-based Wells Fargo, didn’t have an immediate comment.

Wells Fargo will now have to decide whether to increase litigation reserves, said Christopher Whalen, a senior managing director at New York-based Tangent Capital Partners LLC. The high end of estimated litigation losses could be $1.6 billion beyond the reserve already set aside through September, according to the bank’s third-quarter filing.

‘The Big Uncertainty’

“This further illustrates that it will be death by a thousand cuts,” Whalen said in a phone interview today. “The thing we still don’t know is what other claims are going to come out of the woodwork? That’s the big uncertainty with the top four banks.”

Gibbs & Bruns said in a statement last month that it may seek reimbursement from New York-based JPMorgan for more than $95 billion of securities. The figure was “misleading” because it represents the current balance of the debt and not the original amount, which was $232 billion, according to Chris Gamaitoni, a mortgage and banking analyst at Washington-based Compass Point Research and Trading LLC. Gamaitoni’s “base-case estimate” is that the effort will cost JPMorgan about $12 billion, he said in a Dec. 19 report.

Morgan Stanley also received a letter from the law firm in October, which said it was representing holders of at least 25 percent of voting rights in 17 trusts with more than $6 billion in outstanding balances, according to a filing.

BofA’s Proposed Settlement

Bank of America’s proposed $8.5 billion settlement would resolve claims from investors in Countrywide Financial Corp. mortgage bonds. Countrywide was acquired by Bank of America in 2008. The settlement has been criticized as unfair by insurer American International Group Inc. and other investors. New York Attorney General Eric Schneiderman and Delaware Attorney General Beau Biden have also intervened in the case, which is pending in federal court. The bondholder group has defended the settlement, saying in a court filing that rejection of the deal would be “devastating” for investors.

--With assistance from Jody Shenn in New York. Editors: William Ahearn, Rick Green

To contact the reporter on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net


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