Faulty mortgages and foreclosure abuses have cost the nation's five biggest home lenders at least $65.7 billion, according to a tally by Bloomberg News, and new claims may push the industrywide total to twice that amount.
Bank of America Corp., the largest U.S. lender, had the biggest costs, totaling $39.1 billion since the start of 2007, according to data compiled by Bloomberg. JPMorgan Chase & Co., ranked second by assets, followed with $16.3 billion, and Wells Fargo & Co., the biggest U.S. home lender, had $5.09 billion, the data show.
The costs have eclipsed predictions from bankers and analysts that lenders would suffer only modest damage from what Bank of America Chief Executive Officer Brian T. Moynihan has called "the mortgage mess." Paul Miller, the FBR Capital Markets & Co. analyst, said costs for all banks could surpass $121 billion as the bill comes due for lax lending practices.
"You're not talking about improperly stapling together two documents, you're talking about systematic fraud in the system," Neil Barofsky, the former special inspector general for the U.S. Treasury's Troubled Asset Relief Program, said in an interview. "What this shows is that before the financial crisis, the banks were essentially lying to the purchasers of the mortgages about the quality."
Bloomberg's tally was compiled from regulatory filings, company statements and financial presentations by the nation's five biggest mortgage lenders. 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.
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.
Miller, a former bank examiner, previously said costs might range from $54 billion to $106 billion for the banking industry. Under his new $121 billion estimate, which covers only repurchase costs, Bank of America, Wells Fargo, JPMorgan and Ally Financial Inc. will bear 60 percent of the burden, with Bank of America alone paying 33 percent.
Ally, previously known as GMAC Inc., has been hit with $3.28 billion in costs. The Detroit-based financer of auto loans and leases lost $10.3 billion in 2009 and required a government bailout totaling more than $17 billion, largely due to losses from its Residential Capital mortgage unit. Ally is now 74 percent owned by the U.S. Treasury Department.
Costs at Citigroup Inc., ranked third by assets among U.S. lenders, totaled $1.9 billion. The New York-based lender needed a $45 billion bailout as bad bets on subprime loans drove the company to post a 2008 net loss of $27.7 billion. The bailout has since been repaid.
"We have been diligent in settling claims related to the mortgage business, where appropriate," said Gina Proia, a spokeswoman for Ally. "We believe we are appropriately reserved based on what we know today and what we are able to estimate."
Shannon Bell at Citigroup, Thomas Kelly at JPMorgan and Richele Messick at Wells Fargo declined to comment on the data.
Most of Bank of America's costs have been tied to mortgages written by Countrywide Financial Corp., the leading subprime lender, which Bank of America rescued from collapse in 2008.
"The reserves that we have established are part of the effort to address legacy and Countrywide issues and put them behind us," said Jerry Dubrowski, a Bank of America spokesman.
Banks typically made home loans and bundled them into securities sold to private investors and government-backed enterprises. They usually offered "representations and warranties" in which lenders promised to buy back the mortgages or cover losses if the loans turned out to be based on inaccurate or missing data on criteria such as the borrower's income, the property's value or whether it would be used as a primary residence.
"The impact of the reps and warranties was completely underestimated for a long time," said Laurie Goodman, a senior managing director at Amherst Securities Group LP in New York who specializes in mortgage-backed securities. "It's not anymore."
Actions that may boost the total costs include the Federal Housing Finance Agency's Sept. 2 lawsuit against 17 firms, which cited possible defects in $196 billion of mortgage securities bought by the Washington-based Fannie Mae and Freddie Mac, based in McLean, Virginia. FHFA became the conservator for Fannie Mae and Freddie Mac following government takeovers in the 2008 credit crisis.
Last month, American International Group Inc. filed a suit against Bank of America for more than $10 billion, alleging fraud. The bank denied AIG's allegation and blamed the New York- based insurer for the problems.
"AIG recklessly chased high yields and profits throughout the mortgage and structured finance markets," said Larry DiRita, a Bank of America spokesman. "It is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors."
As for foreclosures, banks are negotiating a settlement with state attorneys general that may be valued at $20 billion. All 50 states are investigating whether banks relied on inaccurate, inadequate or missing documents to seize homes.
Success by claimants could push the costs for errors and misrepresentations to more than $100 billion, said Robert Litan, a vice president of research and policy at the Kansas City, Missouri-based Kauffman Foundation, which promotes entrepreneurial activity.
What Went Wrong
"As large as that number is, it's a small fraction of the overall economic damage that the crisis and these mortgages caused to the economy," said Litan, who was on a commission that investigated the savings and loan crisis in the 1980s. "There were trillions of dollars of damage."
The FHFA lawsuit cited the prospectus for one mortgage- backed security underwritten by Bank of America entities, which said no loans were larger than the underlying value of the homes. In fact, 11 percent of loans sampled by the agency fit that description, the suit said. Another securitization said 4.45 percent of the homes weren't owner-occupied, while the true percentage was 15.27 percent, according to the suit.
Fannie Mae and Freddie Mac "acknowledged that their losses in the mortgaged-backed securities market were due to the unprecedented downturn in housing prices and other economic factors," said DiRita at Bank of America.
The industry-wide errors "were not minor slip-ups," said Peter Swire, a law professor at Ohio State University in Columbus, Ohio, and until last year a special assistant to President Barack Obama for economic policy. "Our biggest banks were talking homeowners into taking some of these bad loans at the front end and then dumping fraudulent loans on investors at the back end."
Moynihan at Bank of America has said the lender will sell some of its contracts to handle billings, collections and foreclosures on home loans, and JPMorgan will reduce its remaining mortgage portfolio "until it's close to zero," Chief Executive Officer Jamie Dimon told analysts on a July 14 conference call.
JPMorgan liabilities could swell if it's forced to bear the cost of bad loans made by Washington Mutual Inc., according to the bank's regulatory filings. JPMorgan acquired most of WaMu's assets from the Federal Deposit Insurance Corp. in 2008 after the Seattle-based company became the biggest bank to fail in U.S. history.
WaMu sold securitized mortgages to investors that might be subject to repurchase demands, according to JPMorgan. While the bank contends the FDIC would be responsible for the costs, the agency contested that position and the dispute hasn't been resolved, according to a July 14 JPMorgan presentation.
Analysts have predicted banks will face more claims if home prices continue to decline and foreclosures keep rising. Default notices sent to overdue U.S. homeowners surged 33 percent in August from the previous month, and total foreclosure filings increased 7 percent, according to a Sept. 15 report from RealtyTrac Inc., the Irvine, California-based data seller. The increase in default notices was the biggest monthly gain in four years.
Collectively, that leaves investors with little certainty on how big the tally may become, according to Barofsky, the former TARP official and now a senior fellow and adjunct professor at the New York University School of Law.
"I don't think anyone knows where the bottom is for all these costs," he said.