Bad mortgage nightmare could cost banks $60 billion

Bank of America

Bank of America is one of two banks gearing up to fight a clause saying it has to buy back mortgages. Image: Flickr / MoneyBlogNewz / CC-BY

The repackaging of mortgages into securities, for many investors, ended up being a bad deal. The bad deal, however, could end up being banks’ responsibility. A clause written into many of the securities could mean banks have to spend $60 billion to re-buy mortgages gone bad.

Security clauses for mortgage securities

When banks packaged, sold and re-packaged mortgage securities for sale, they made billions of dollars. Many of these mortgage securities were more than just bad credit loans, however. The securities also contained a clause that said if the loans go south, the bank would re-purchase the loans. During the height of the mortgage bubble, this seemed like a minor issue. Now that billions of homes are in foreclosure, that clause is forcing buybacks, and banks are putting up a fight.

$60 billion liability

The buyback clause on mortgage-backed securities has been triggered by dropping credit ratings and values. Credit ratings agencies estimate that the nation’s six largest banks face about $60 billion worth of buyback liability. Half of that liability is owed to U.S. Government-backed Freddie Mac and Frannie Mae. In January, Bank of America paid Frannie and Freddie $2.5 billion to buy back a portion of those mortgages. These mortgages are spread all over the country, with a high number in high-foreclosure states such as Nevada.

Years of buybacks in the works

JPMorgan Chase and Bank of America are the two banks with the “highest exposure” to buybacks. There are three groups of businesses seeking to sue banks that are not buying back mortgages — insurers, mortgage finance companies and private investors. Even if the banks do repurchase some of the loans, as dictated in the terms of the packaged securities, they likely will not buy them all back. In the end, that means that banks will have years of possible lawsuits and bad loans on the books, all while the investors are stuck with foreclosed homes that their contracts say they should not have.


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