BANKS FACE TWO-FRONT WAR ON BAD MORTGAGES, FORECLOSURES

Shoddy mortgage lending has led bankers into a two-front war, pitting them against U.S. homeowners challenging the right to foreclose and mortgage-bond investors demanding refunds that could approach $200 billion, Bloomberg News reported today. While federal regulators and state attorneys general have focused on flawed foreclosures, a bigger threat may be the cost to buy back faulty loans that banks bundled into securities. JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. have set aside just $10 billion in reserves to cover future buybacks. Bank of America alone said this week that pending claims jumped 71 percent from a year ago to $12.9 billion of loans. Investors such as Bill Gross’s Pacific Investment Management Co. contend that sellers are obligated to repurchase some mortgages because of misrepresentations such as overstatements of borrowers’ income or inflated appraisals. Their case may be bolstered by probes in 50 states into whether banks used documents that were also flawed to conduct foreclosures. Neither dispute is likely to be resolved quickly. The biggest risks for banks may be loans packaged into mortgage-backed securities during the housing bubble, of which $1.3 trillion worth remain. The aggrieved bondholders include government-controlled firms Fannie Mae and Freddie Mac, bond insurers and private investors.

http://www.bloomberg.com/news/2010-10-21/banks-face-two-front-war-on-bad-u-s-mortgages-flawed-foreclosure-process.html