Banks Facing $100B More in Costs to Settle Mortgage-Related Cases: S&P

November 27, 2013

The largest U.S. banks may need to pay out up to an additional $105 billion to settle legacy mortgage-related issues, but have a capital cushion that would help them absorb these losses, according to a report by ratings agency Standard & Poor’s.

Eight of the top U.S. banks, including JPMorgan Chase & Co. and Bank of America Corp., may have an additional exposure of between $56.5 billion and $104 billion in potential mortgage-related payouts, the S&P report said.

Banks have faced a new wave of lawsuits as the government investigates their role in the packaging and sale of mortgage-backed securities comprising of bad loans in the run up to the financial crisis.

“Notably, mortgage-related litigation has recently gotten a second wind and has expanded beyond investor claims,” S&P credit analysts led by Stuart Plesser wrote in the report.

The government has been seeking to hold firms liable under the Financial Institutions, Reform, Recovery and Enforcement Act of 1989 (FIRREA), which it uses to recover civil penalties for losses to federally insured financial institutions.

The largest banks, combined, could have a $155 billion buffer to absorb the losses and the banks’ buildup in capital would help them withstand potential legal costs, S&P said.

The increase in litigation reserves significantly weighed on third-quarter profit for U.S. banks, the federal banking regulator said on Tuesday.

JPMorgan, the biggest U.S. bank by assets, reported its first quarterly loss under Chief Executive Jamie Dimon in October, as it recorded more than $9 billion of expenses to build its litigation reserves.

It agreed to pay $4.5 billion earlier this month to settle claims by investors who lost money on mortgage-backed securities.

Bank of America agreed to a $8.5 billion settlement in June 2011 with 22 institutional investors. The deal is still awaiting court approval.

S&P, however, said that while an unexpected legal expense could result in the weakening of a bank’s business model, it had considered heightened legal issues into its ratings.

“Despite the substantial legal costs already incurred and the raft of new legal issues, we currently don’t expect legal settlements to result in negative rating actions for the U.S. banks with the largest legal exposure,” the S&P report said.

Topics USA

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