Costs from shoddy foreclosures and faulty mortgages have reached US$72 billion (S$89.80 billion) at the largest US banks, as the conclusion nears on a 50-state probe on mortgage practices.
According to Bloomberg, the five largest home lenders during the real estate boom, which include Bank of America Corp, Wells Fargo & Co, Citigroup Inc, Ally Financial Inc and JPMorgan Chase & Co, recorded at least US$6.78 billion (S$8.46 billion) in new expenses related to mortgages during the second half of last year.
Bank of America, which is ranked second among US banks in terms of assets, contributed US$41.8 billion (S$52.13 billion) to the overall total.
The escalating costs are driving regulators and lenders to resolve the lawsuits and investigations over faulty mortgages, including a 50-state review of foreclosures. The probe over the status of the old loans has made several banks more hesitant in offering new loans.
“It’s a colossal failure of basic banking,” said David Knutson, a credit analyst in Chicago with Legal & General Investment Management, a holder of some the lender’s bonds.
Most of the expense was due to the refund option being asserted by investors who bought the mortgages and discovered defects in its underwriting, such as false data about home values and borrower income. Typically the sales of mortgages to investors carry promises, known as warranties and representations to buy back defective loans.
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