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Banks Lose Big Over Bad MBS, Numerous Suits

Even as the good news emerged that fewer banks are failing countrywide, ""_Bloomberg News_"":http://www.businessweek.com/news/2011-09-16/mortgage-debacle-costs-banks-66-billion-as-suits-sap-profit.html found that the nation's biggest lenders have lost some $65.7 billion in bad mortgage-backed securities, with billions in the red. A number of suits by mortgage lenders, one against the other, plus a barrage of action to recover losses for ""Fannie Mae"":http://www.fanniemae.com/kb/index?page=home and ""Freddie Mac"":http://www.freddiemac.com/ suggest more losses may be in store for U.S. financial institutions.

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_Bloomberg_ compiled the data by adding up the sum total of gains and losses from financial statements and regulatory filings.

What did the news service find?

Of the nation's biggest lenders, ""Bank of America"":https://www.bankofamerica.com/ saw the most red, with $39.1 billion in dollars never seen again since January 2007. _Bloomberg_ ranked several other lenders after, with ""JPMorgan Chase"":http://www.jpmorganchase.com/corporate/Home/home.htm suffering a $16.3-billion hit and ""Wells Fargo"":https://www.wellsfargo.com/ oozing $5.09 billion as a result of securitized loans that went bust during the financial crisis.

According to the news service, ""Ally Financial Inc."":https://www.ally.com/index.html?CP=ppc130830 and ""Citigroup Inc."":http://www.citigroup.com/citi/homepage/ followed the big three with $3.28 billion and $1.9 billion in losses. Unequal capital positions in the marketplace meant that some banks hurt more than others, with Wells Fargo, third on the list, and Citigroup, ranking fifth, both placing first and third among mortgage lenders with the most assets nationwide.

The share of culpability for the financial crisis waxes even more unequal for other lenders.

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_Bloomberg_ quoted Paul Miller, a onetime bank examiner, now an analyst with ""FBR Capital Markets & Co."":http://www.fbr.com/, as saying that Bank of America, Wells Fargo, JPMorgan, and Ally will absorb 60 percent of expenses in faulty loans and litigation, with the former shedding capital to cover 33 percent of the overall costs.

The cost breakdown arrives amid a flurry of suits to recoup the losses. On Thursday Wells Fargo ""pressed its advantage"":https://themreport.com/articles/latest-suit-adds-to-mbs-woes-for-jpmorgan-chase-2011-09-15 against JPMorgan Chase by filing suit to ensure that the latter repurchases the bad mortgage-backed securities that have afflicted the lender.

In early September the ""Federal Housing Finance Agency"":http://www.fhfa.gov/ (FHFA) opened up a ""staggering 17 suits"":https://themreport.com/articles/fhfa-may-sue-mortgage-giants-over-mbs-losses-2011-09-02 to recover some $41 billion in losses for Fannie and Freddie, according to the _Los Angeles Times_.

Federal officials are claiming that a system tanked by systemic and fraudulent activity needs to account and cover the losses.

""You're not talking about improperly stapling together two documents, you're talking about systematic fraud in the system,"" _Bloomberg_ quoted Neil Barofsky, the former special inspector general for the Troubled Asset Relief Program, as saying. ""What this shows is that before the financial crisis, the banks were essentially lying to the purchasers of the mortgages about the quality.""

Other market watchers insist that the financial losses confer a setback upon the economy at large as more lenders pay out in expensive litigation.

Speaking with _MReport_ for a past story, ""Tim Rood"":http://www.collingwoodllc.com/team.html, a managing partner with the ""Collingwood Group"":http://www.collingwoodllc.com/index.html and a past principal for Fannie Mae, shared his views about the bigger picture.

""You have a lot of unintended consequences from these moves,"" he said. He explained that mortgage lenders could find themselves more prone to market risk and insolvency as a consequence of tens of billions of dollars in litigation costs.

""If we go after these guys, we should be a bit more thoughtful about how this will help the economy,"" Rood told _MReport_.

About Author: Ryan Schuette

Ryan Schuette is a journalist, cartoonist, and social entrepreneur with several years of experience in real-estate news, international reporting, and business management. He currently lives in the Washington, D.C., area, where he freelances for DS News and MReport.
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