BANK LIABILITY FOR SUB-PRIME LENDING
Was the mortgage mess a result of an unanticipated collapse of home prices nationwide? Or, did the banks misrepresent the securities that they sold thus causing the financial meltdown?
Banks may face yet another major setback in the next few years. When banks packaged and sold mortgage securities from 2005 – 2007, they included representations and warranties to the investors and institutions that invested in the loans. There is growing evidence that the reps and warranties made by the banks were misrepresented. Many institutional investors like Fannie Mae, Freddie Mac, and Black Rock are seeking to give back the mortgages they purchased, thereby forcing the banks to eat the losses. Banks, which have taken a $13 Billion defective mortgage bath already, may have to swallow as much as an additional $30 Billion from Fannie Mae and Freddie Mac alone on more bad loans. Fannie and Freddie guarantee about half of all mortgages in the US and are aggressively seeking additional relief.
Individual investors may also cause serious issues for the banks over the next few years. Private label securities issued by the banks totaled almost $3 Trillion and caused serious losses to the individual investors. This group has stronger contract language in their contracts that allows them to demand documentation on all mortgage loans. It is estimated that banks may lose as much as $180 Billion in mortgage securities buy-backs. This group of investors includes the Federal Reserve Bank of New York, PIMCO, and Metropolitan Life. They are attempting to force Bank of America to buy back $47 Billion in defective mortgage bonds. Banks’ efforts to deal with these losses may impact their willingness to make new mortgage loans. Although banks have recently enjoyed record profits, much of this extra cash must be reserved in anticipation of buy-backs due to fraudulent activities during the ‘Boom Years’.