BofA, Goldman among banks facing $16 billion in fines

BofA, Goldman among banks facing $16 billion in fines

NEW YORK (MarketWatch) — The settlements of lawsuits so far with major banks pave the way for some $16 billion in additional penalties to be paid by banks including Bank of America and Goldman Sachs Group over mortgage securities sold to government-seized housing giants Fannie Mae and Freddie Mac.

Of the banks that have recently settled — including Morgan Stanley MS +1.92%  last week — the settlement amounts equate to roughly 12% to 13% of original principal balance of securities sold to the GSEs. The remaining banks could expect to pay approximately $16 billion in total if that settlement range holds.

Expect the majority of financial firms to settle this year on billions of dollars from outstanding lawsuits with the government, related to the sale of mortgage-backed securities, sources tell MarketWatch.

Out of the 18 financial institutions that have been sued by the Federal Housing Finance Agency, seven firms have settled, including Morgan Stanley and J.P. Morgan Chase & Co. JPM +0.05%.

“Most of the banks would like to settle as part of the herd and not stand out,” said John Coffee, a law professor at Columbia Law School. “It’s less individual culpability that way.”

Morgan Stanley disclosed it has settled with FHFA for $1.25 billion in a regulatory filing and the bank also added $150 million into its legal reserves as part of the disclosure. That is approximately 12% of the $10.58 billion securities that the FHFA states in the lawsuit the firm sold to Fannie and Freddie.

The FHFA began to oversee the two government agencies that guarantee the majority of U.S. residential mortgages, Fannie Mae and Freddie Mac, as a result of the financial crisis. And in 2011 it sued 18 banks over alleged faulty securities the banks sold to the two mortgage giants.

Banks including Citigroup Inc. C -0.02%  and UBS AG UBS +0.78%  have already settled, however, other lawsuits remain outstanding, including against Bank of America Corp.BAC -0.12%  and Goldman Sachs Group Inc. GS -0.17%  

“You have to assume the same percentage will be applied to the other banks,” said Coffee.

Bank of America for example has two related suits stemming from Merrill Lynch and Countrywide, which the firm bought in 2008, totalling $51.5 billion in mortgage securities sold to Fannie and Freddie. Including its own originations, a 13% payout would be approximately $7.4 billion. Bank of America had no comment on the matter.

According to the FHFA lawsuit, Goldman Sachs sold $11.1 billion residential mortgage-backed securities to Fannie and Freddie, which could point to a settlement amount of $1.44 billion if the trend is correct. Goldman Sachs also declined to comment.

It’s much easier to settle the remaining cases once the bigger players settle, say sources.

However, each case is different and depends on the quality of the investments, say analysts.

For instance, General Electric Co. GE +0.28%  , at 34%, and Ally Financial, at 28%, paid much more than the 12-13% range seen with the major banks.

“A lot of it has to do with the underlying quality of assets,” said Brad Hintz, analyst at Sanford Bernstein. “It’s impossible to look at the mortgages securities and say they were of the same quality, especially leading up to the financial crisis.”

Banks generally do not disclose how much is set aside for litigation costs, however. J. P. Morgan recently revealed it had set aside $23 billion.

The FHFA is in a difficult place says industry watchers. The Inspector General’s office has oversight over the agency and has to report to Congress that includes questions of the size of settlements being too big or too small.

Sen. Elizabeth Warren notably has criticized federal regulators for being too soft on large institutions.

Almost 40% or more of the banks have settled and a lot more will settle this year, noted Coffee.

“You don’t want to be the last to settle,” said Coffee.