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Banks Face Two-Front War On Bad Mortgages, Flawed Foreclosures

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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.

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.

“It’s going to be trench warfare with years of lawyering,” Christopher Whalen, managing director of Institutional Risk Analytics, said in a telephone interview from White Plains, New York. “The banks can’t afford to lose.”

The biggest risks for banks may be loans packaged into mortgage-backed securities during the housing bubble, of which $1.3 trillion remain. The aggrieved bondholders include government-controlled firms Fannie Mae and Freddie Mac, bond insurers and private investors.


Going to Cost Them’

“The potential for owners to challenge lenders on foreclosure improprieties certainly is there,” Pallotta said. “Even if it turns out that the banks were right in 99 percent of these foreclosures, the additional diligence on their part, going forward, is going to cost them more money.”


About 26 percent of mortgages underlying securities without government backing are at least 60 days late, in foreclosure proceedings or already backed by seized homes, according to data compiled by Bloomberg.


“It’s troubling that the people who caused the problem have walked away and left everybody else to fight over who gets stuck with the tab,” Eggert said in a telephone interview. “It’s like a massive game of dine and dash.”

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"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."

Funny really that the only thing the banks really do is act as middleman and take as much of a cut as they can get away with.

And now we find out they can't even do that properly.

And they still get bonuses.

Time for a not-for-profit bank to manage the payments system, the rest of them can go rot.

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They're also facing challenges from the monoline insurers (like AMBAC), heat from Congressmen and State Attorney Generals, the refusal of sheriffs to enforce foreclosure without proper documentation. Oh, and I think some couple have filed racketeering charges against them under RICO


Edited by mdman
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bankers FACE this?...

just thinking out loud here, but why are they FACING this?....

they lent the money, they set up the systems, they packaged everything up, they sold the deals.

Posters here have boasted ( way back) that it took great skill to put these packages together, and they paid the best of the best the most to do it..

clearly, if that skill existed, it wasnt used.

everything that rains upon them, they did it to themselves.

Thats what happens when the regulators have a light touch....the bonfire just gets bigger and drier....a slight spark, and hey.....

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Boom time for litigators.

Boom time for traders.

What else?

Banks don't lose. Depositors do.

depositors have a choice on where they leave their deposits.

they are also protected up to 50K per institution.

bankers could lose their 100K plus bonuses on mass.

depositors should be more wary where they are leaving their cash, and in the same spirit, BANKERS should be forced to care about their depositors....bailing them encouraged no prudence and put depositors at very grave risk....and its no where near over yet.

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Didn't someone famously say never fight a war on two fronts?

I'm seem to remember when they ignored their own advice things went tits up for them.

The lawyers are coming and they can smell money.

Obama is going to be caught between a rock and a hard place on this one. Does he back the people or the bankers.

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