Bloomberg News

Bad Home Loans Top $72 Billion in ‘Colossal Failure’: Mortgages

February 14, 2012

Feb. 8 (Bloomberg) -- Costs from faulty mortgages and shoddy foreclosures have topped $72 billion at the biggest U.S. banks as they near a settlement of a 50-state probe into the industry’s practices.

Wells Fargo & Co., Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Ally Financial Inc., the five largest home lenders during the real estate boom, tallied at least $6.78 billion in new costs tied to mortgages during the second half of 2011, according to data compiled by Bloomberg. Bank of America, ranked second among U.S. banks by assets, contributes $41.8 billion of the overall total.

The mounting costs are pushing lenders and regulators to resolve investigations and lawsuits over faulty home lending, including a 50-state review of foreclosures. The wrangling over the status of old loans has made some banks more reluctant to make new ones, even as Federal Reserve Chairman Ben S. Bernanke appeals for action to increase lending and fix the U.S. housing market because it’s a drag on the economic recovery.

“It’s a colossal failure of basic banking,” said David Knutson, a credit analyst in Chicago with Legal & General Investment Management, a holder of bonds in some of the lenders involved. “It’s surprised everyone in terms of persistence and longevity and I think it will continue to surprise.”

‘Fear of the Unknown’

The banks are negotiating a settlement said to be worth as much as $25 billion with state attorneys general, and it may expand later to include some smaller lenders that made mortgage loans. While an accord could be announced as early as this week, some states have been holding out for tougher and possibly more expensive terms, including the right to press future legal claims.

“The fear of the unknown is a lot worse than when you finally get a figure,” said Alex Lieblong of Key Colony Management LLC, which manages about $153 million, including shares in Bank of America and Wells Fargo. “If you could get it all into a box and say that this is the known figure, then that will be viewed as a positive.”

Spokesmen for all five of the lenders declined to comment.

The bulk of the expense was triggered by investors who bought mortgages and then demanded refunds after finding flaws in the underwriting, including false data about borrower incomes and home values. Such sales to investors typically came with promises, known as representations and warranties, to buy back defective loans.

Outstanding claims against Bank of America jumped 22 percent in three months to $14.3 billion as of Dec. 31.

Countrywide Acquisition

Bloomberg’s tally also includes expenses tied to court cases and investigations. Bank of America’s increase of at least $2.65 billion in mortgage costs during the second-half of 2011 included $1.76 billion tied to litigation, filings show.

That increased total costs since the start of 2007 for the Charlotte, North Carolina-based bank to $41.8 billion. Chief Executive Officer Brian T. Moynihan has been hobbled by bad loans created at Countrywide Financial Corp., acquired in 2008 as the subprime home lender careened toward possible bankruptcy.

The combined company, which once accounted for one in every four U.S. mortgages, now controls only 5.6 percent of the market, according to FBR Capital Markets Corp., as Moynihan tries to stanch losses at the home lending unit.

Wells Fargo, now the biggest home lender with 30 percent of the market, added $794 million to its repurchase reserve for the six months. The San Francisco-based company said Jan. 17 it would pay $100 million to meet with the requirements of so- called requirement of consent orders that banks signed with federal regulators last April designed to curb any abuses. That brings its total costs to at least $5.98 billion.

Costs Surge

JPMorgan, the biggest U.S. lender, saw costs surge by at least $2.25 billion during the six months, increasing mortgage expenses to $18.5 billion, according to regulatory filings. The New York-based firm, led by CEO Jamie Dimon, added $1.53 billion in legal costs during the period, the filings show.

Citigroup, the third-biggest U.S. bank, didn’t disclose specific litigation costs for mortgages. Vikram Pandit, CEO at the New York-based company, set aside more than $600 million for repurchasing faulty loans during the last six months of 2011, more than the $541 million set aside by Bank of America.

Citigroup said in a Jan. 24 presentation that litigation costs at its Citi Holdings unit were $1.1 billion in 2011. The majority of those expenses were tied to a $109 billion mortgage portfolio, according to a person briefed on the costs, who declined to be identified because he wasn’t authorized to comment publicly about the matter.

Citigroup Losses

Bloomberg News excluded the $1.1 billion cost from the overall tally. Citigroup’s total legal and repurchase costs from the mortgage crisis so far are at least $3.61 billion when this figure is included. The total number for the five banks rises to more than $73 billion.

Pandit created Citi Holdings to hold and sell troubled assets in the wake of the lender’s $45 billion bailout in 2008. The bank lost $29.3 billion for 2008 and 2009 combined, much of it tied to subprime mortgage bonds.

“We remain concerned about the U.S. housing market,” Pandit said on an Oct. 17 call with analysts. “The U.S. residential mortgage portfolios of most banks remain their greatest risk.”

Ally, the lender controlled by U.S. taxpayers following a bailout, added $114 million to its repurchase reserve during the period, filings show. The Detroit-based company also said last month it will record a fourth-quarter charge of about $270 million for penalties associated with foreclosure practices by its mortgage unit Residential Capital LLC, bringing total costs to about $3.67 billion since 2007.

Ally Penalties

Michael Carpenter, Ally’s CEO, wants to sell the firm’s shares in an initial public offering to help repay $17.2 billion of bailout funds to taxpayers. This is unlikely to happen until issues tied to faulty home loans are resolved, Carpenter said last week.

Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and analyst with FBR Capital Markets, wrote in a note last September that bank losses from repurchases could surpass $121 billion. About 60 percent of that, or about $72.6 billion, might be incurred by Bank of America, Citigroup, JPMorgan and Wells Fargo, Miller wrote.

The mounting costs sparked concern that some lenders might need to raise capital and helped send their stocks reeling last year, with the KBW Bank Index down 25 percent in 2011. Bank of America was the worst performer in the Dow Jones Industrial Average with a 58 percent plunge; this year, the company leads the Dow with a 41 percent gain amid signs that the U.S. economy is gathering strength.

Robo-Signing Investigation

All 50 states announced almost 16 months ago they were investigating disclosures of so-called robo-signing, a term that describes the practice of mortgage lenders and their contractors vouching for foreclosure documents without verifying them. Officials from a group of state attorneys general offices and federal agencies, including the Justice Department, have since been involved in negotiating terms of a proposed settlement with the banks.

The Justice Department also contacted smaller mortgage lenders, including U.S. Bancorp, PNC Financial Services Group Inc. and HSBC Holdings Plc, with the goal of including them in any future settlement agreement.

More than 40 states signed on to the accord, according to Iowa Attorney General Tom Miller, who is helping to lead talks with the banks. Other attorneys-general, including California’s Kamala Harris and New York’s Eric Schneiderman, have yet to join the settlement.

MERS Litigation

The accord may not cover a new round of litigation from local governments, who may claim they were cheated out of fees by the industry’s electronic system of registering and transferring mortgages, known as MERS. Banks used the database to help speed the sale of home loans for more than a decade as trading in mortgage-backed bonds accelerated, bypassing some traditional real-estate recording practices.

“There are counties out there that are desperate for revenue that may come after the banks,” said Peter Henning, a law professor at Wayne State University in Detroit. “The MERS- related litigation could run into the billions.”

Bloomberg’s tally was compiled from regulatory filings, company statements and financial presentations. The data cover provisions and expenses attributable to repurchases, foreclosure errors and abuses, payments to reimburse investors for lost value on faulty mortgages, legal settlements and litigation expenses.

Smaller Banks Included

The compilation also includes writedowns of assets, such as mortgage servicing rights, when the company attributed the loss in value to problems in mortgage underwriting or foreclosures and the costs of remedies. The figures may increase as more detailed breakdowns become available.

Bloomberg’s tally focused only on firms that were among the top five home lenders during the mortgage boom. The industrywide total would be closer to $75 billion if smaller banks and securities firms were included.

U.S. Bancorp reported a $130 million expense in the fourth quarter tied to mortgage servicing by the Minneapolis-based company, ranked fifth by deposits. CEO Richard Davis told investors in January that smaller banks had been invited into settlement talks with the attorneys general, and “we believe we have something that we need to reserve for.”

PNC, the sixth-largest U.S. lender by deposits, set aside $240 million for costs tied to residential mortgage foreclosures as a result of “ongoing governmental matters,” the Pittsburgh- based company said.

California, New York, Nevada, Florida and Massachusetts are among the states that haven’t signed off on a settlement with banks over foreclosure abuses, according to state officials and two people familiar with the talks. Even a quick agreement may not help the banks keep the tally from soaring even higher.

“It does give them certainty and it gives them a PR boost,” said Wayne State’s Henning. “But it isn’t over. They may want to be out of the headlines but this isn’t the last we’re going to hear about mortgages.”

--With assistance from David McLaughlin and Michael Hytha in New York and Lorraine Woellert in Washington. Editors: Rick Green, Pierre Paulden

To contact the reporters on this story: Donal Griffin in New York at dgriffin10@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Rob Urban at robprag@bloomberg.net


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