The results of this would be “severe,” according to academics, industry experts, regulators and the panel’s report.
“If such problems were to arise on a large scale, the housing market could experience even greater disruptions than have already occurred, resulting in significant harm to major financial institutions,” the report states.
From underwriting fraudulent mortgages; to shuffling it through the mortgage securitization chain without followed proper legal procedures like the simple act of passing along paperwork; to concealing or doctoring basic facts when securitizing the mortgages and selling them to investors, large lenders and their partners on Wall Street could face hundreds of billions of dollars in losses by being forced to buy back faulty mortgages, some of which have already defaulted, from misled investors.
Analysts from Compass Point Research and Trading LLC pegged potential losses for 11 global banks to reach $179.2 billion, the Washington-based firm said in an Aug. 17 report.
Investors bought mortgage-linked securities with the promise that the mortgage conformed to basic underwriting standards, and that proper procedures were followed along the way. Steep losses on those investments and the discovery of potentially fraudulent activity pushed investors to force banks to buy them back.
The Federal Reserve Bank of New York and government-controlled mortgage giant Freddie Mac are among a group of bondholders demanding that Bank of America buy back some $47 billion worth of distressed home loans packaged into securities. Freddie and Fannie Mae also have billions in outstanding repurchase requests big banks have yet to act on. Their government overseer, the Federal Housing Finance Agency, recently issued 64 subpoenas seeking information from Wall Street. Private investors have scores of outstanding requests and have initiated numerous lawsuits.
The discovery of robo-signers, the oversight panel argues, could simply be the tip of the iceberg. If so, more revelations could only increase the pressure on large banks. Their potential exposure to losses could skyrocket.
Using financial analysts’ estimates, the panel said that the nation’s four largest banks by assets — BofA, JPMorgan, Citigroup and Wells Fargo — face about $52 billion in losses from repurchase requests. The figure is derived from $5 trillion worth of mortgage-backed securities sold from 2005 to 2008, which will result in $882 billion in losses. Of those losses, investors will request that banks buy back $240 billion in loans, of which only $103 billion will be successfully put back on the banks. The banks will suffer losses on half of that, the panel reasons.