As if US banks didn’t have enough troubles, a new wave of lawsuits related to the 2008 mortgage crisis is about to hit. Banks have paid tens of billions of dollars to settle lawsuits claiming banks sold shoddy mortgages that blew up during the financial crisis.
Estimates are that the new suits could cost banks up to $300 billion additional dollars if the banks come out as losers on the new litigation wave.
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This would hurt profitability and further hamper economic growth since banks would be less willing to lend just as the recovery in the housing market is gaining footing.
It’s an all-time high for mortgage litigation. A high-profile lawsuit involving the Federal Housing Finance Agency (FHFA) will stand as the precedent by which banks may be able to limit their losses.
It’s a $200 billion case filed against 17 banks last year by the FHFA, accusing the banks of duping government agencies Fannie Mae and Freddie Mac into buying low-quality securities.
Attorneys for some of the largest banks descended on a federal appeals court, saying FHFA had waited too long to sue.
A ruling in the banks’ favor could also affect claims by federal housing regulators.
At the same time, banks are working to reach a broad settlement with housing agency officials.
This spills over into Wall Street, adding vulnerability on several fronts, primarily from the enormous price tag of the litigation.
In the most extreme situation, the lawsuits could drain banks’ well-stocked reserves and harm profits. So far, only a small amount of the litigation has been settled and future cases look to dwarf the settlement payouts already made.
Private investors are also looking for banks to buy back securities
that misrepresented the quality of the loans in the mortgage pools backing them.
It seems the banking sector’s worst days may be ahead rather than behind it.