Even before Lehman Brothers filed for bankruptcy on September 15, 2008, there was already a deluge of government investigations and private lawsuits underway, and those that will surely and perhaps endlessly materialize. Recently we penned a post advising that JPMorgan Chase had agreed to pay $153.6 million to settle civil fraud charges that it misled buyers of complex mortgage investments as the housing bubble was imploding. I would like to underscore the fact that this settlement amounts to less than one percent of the bank’s 2010 net income of $17.4 billions—or less than what JPMorgan Chase earns in only one week. A drop in a bucket would describe it better.
It was recently in the news that another financial Master of the Universe was affected by the Wall Street meltdown. This time it’s Bank of America. Bank of America is completing an agreement to pay $8.5 billion to settle claims by investors that purchased mortgage securities that soured when the housing bubble burst, according to people briefed on the deal. It represents what is likely to be the single biggest settlement tied to the subprime mortgage boom and the subsequent financial crisis of 2008.
The settlement would wipe out all of the company’s earnings in the first half of this year, and it could also provide a template for deals with other big banks that face tens of billions in similar claims.
The proposed settlement is with a group of more than 20 investors that include the asset managers Pimco, Metropolitan Life and BlackRock, as well as the Federal Reserve Bank of New York. Together they hold mortgage-backed securities that represent more than $100 billion in home loans from Bank of America, the nation’s biggest bank by assets.
The securities affected by the deal come from Countrywide Financial, the subprime mortgage lender whose practices have come to symbolize the excesses of the housing boom. Bank of America bought Countrywide in 2008.
The settlement goes beyond just the securities owned by these investors, however. It covers nearly all of $424 billion in mortgages that Countrywide issued, which were then packaged into mortgage bonds. That means that a broader group of investors will share in the proceeds, according to the people who were briefed on the proposed settlement, but were not allowed to speak publicly.
Bank of America, JPMorgan Chase, Citigroup and Wells Fargo have the greatest exposure to the legal claims that they bundled toxic home loans and sold them as sound investments. Together, they are likely to absorb roughly 40 percent of the industry’s mortgage-related losses.
Still, other huge risks loom from the fallout of the subprime mortgage crisis. All 50 state attorneys general are in the final stages of settling an investigation into abuses by the biggest mortgage originators, and are pressing the big banks to pay up to $30 billion in fines and penalties.
What’s more, insurance companies that backed many of the soured mortgage-backed securities are also pressing for reimbursement, arguing that the original mortgages were underwritten with false information and did not conform to normal standards.
I wouldn’t surprised if future investigations and private lawsuits will affect bank executives such as Richard S. Fuld, CEO of Lehman Brothers, Joseph Gregory, President of Lehman Brothers, and Erin Callan, CFO (Chief Financial Officer) of Lehman Brothers, just to name a few executives of the fourth largest investment bank that collapsed during the financial catastrophe.
While it appears that Bank of America has so far only issued about 20 reverse mortgages to borrowers with option ARMs it looks like a good start to fixing a significant problem. Around 257 000 homes entered the foreclosure process in May up 5.7 from April and 34 from a year ago..What is perhaps most interesting about these statistics is that the number of subprime mortgages going into foreclosure has decreased 16 from a year ago. Even so these statistics are quite sobering..It is important to remember that reverse mortgages can be one way for senior borrowers in these situations avoid foreclosure.