INVESTMENT BANKING
Banks Brace for Costly Fights Over Mortgage Mess (NYT)
By NELSON D. SCHWARTZ
8:14 p.m. | Updated Even as investors put aside their worries on Friday about the effect of the foreclosure mess on bank stocks, new signs emerged of what is likely to be a long and expensive legal battle for the financial services industry over mortgages gone bad.
Citigroup disclosed in a regulatory filing that it was being sued by several investors, including Charles Schwab and the Federal Home Loan Bank of Chicago, in an effort to force Citigroup to buy back soured mortgages that the investors contended did not conform to proper underwriting standards.
Meanwhile, Wells Fargo said in a filing that it “cannot estimate the possible loss or range of loss” from these cases, and Bank of America said in a filing that investors holding $375 billion worth of mortgage securities had filed similar suits.
In a separate announcement, however, Bank of America said a lawsuit brought by the Maine State Retirement System and other investors was dismissed on Thursday by a federal court in California, reducing that $375 billion figure to $54 billion. But that news came after the S.E.C. filing had already been prepared.
The dismissal is a significant victory for Bank of America and underscores the legal challenges in trying to force banks to buy back defaulted mortgages.
“The court’s ruling demonstrates the strict legal hurdles plaintiffs face in bringing these sorts of claims,” said Brian E. Pastuszenski, counsel for Bank of America’s Countrywide unit.
Still, Bank of America faces a different effort by other investors, including the Federal Reserve Bank of New York and Pimco, the giant money management firm, to force it to buy back a portion of roughly $47 billion in mortgages they hold. Neither the $375 billion nor the $54 billion figure reflects this push, because those investors have yet to sue.
On Thursday, Bank of America’s lawyers sent a strongly worded letter to the lawyer leading the $47 billion effort, rejecting her claims as “utterly baseless.” The bank contends the any loss of value stemmed from the economic downturn rather than an underlying problem with how the mortgages were sold to investors or have been serviced.
Bank of America and other large institutions like JPMorgan Chase and GMACMortgage have been criticized for pursuing foreclosures without the proper paperwork or with signatures by so-called robo-signers.
But on Wall Street, the worry is that efforts to force the banks to buy back defaulted mortgages could actually be a longer and more expensive fight for the industry. Some analysts estimate the eventual cost could total tens of billions of dollars, and that worry pushed down shares of the big banks sharply last month.
Indeed, Bank of America’s chief executive, Brian T. Moynihan, has signaled that the threat of forced buybacks will not be resolved quickly — or cheaply.
“It’s loan by loan, and we have the resources to deploy in that kind of review,” he said last month, during a conference call to discuss the bank’s financial results for the third quarter. “We’d love never to talk about this again and put it behind us, but the right answer is to fight for it.”
Despite the disclosures, bank stocks rallied for the second day in a row. Bank of America shares closed up 23 cents, at $12.36, while Citigroup rose 16 cents, to $4.49, and Wells Fargo jumped $1.76, to $29.22.
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