Originally published Friday, October 21, 2011 at 5:00 PM

Faulty mortgages have cost 5 biggest home lenders $69 billion

Bank of America has the largest total: $40.3 billion.

Bloomberg News

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JPMorgan Chase disclosed $1.3 billion of new expenses tied to faulty mortgages and foreclosures in its third quarter, pushing the bill for the five biggest home lenders since 2007 to almost $69 billion.

JPMorgan, the biggest U.S. bank by assets, set aside $314 million for buying back defective loans and incurred $1 billion in litigation costs caused mostly by mortgages, according to its Oct. 13 report. That brought the New York-based bank's total to at least $17.6 billion, according to data compiled by Bloomberg.

Cost are mounting as borrowers, investors and states accuse banks of sloppy lending and improper foreclosures. The total may top $120 billion because mortgage buyers such as Fannie Mae are becoming more aggressive, said Paul Miller, the FBR Capital Markets analyst, and claims are spreading to loans written after banks said they changed their practices.

"This is still far from over," said Neil Barofsky, former inspector general for the U.S. Troubled Asset Relief Program. "These numbers are very high to begin with, but this is now an enormous overhang on the industry, and it's well deserved. Sooner or later the banks will pay the price for their behavior."

During the housing boom, banks issued mortgages and bundled them into securities sold to private investors and government-backed enterprises. They usually offered "representations and warranties" in which lenders promised to buy back the mortgages or cover losses if the loans turned out to be based on inaccurate or missing data on criteria such as the borrower's income, the property's value or whether it would be used as a primary residence.

Regulators said banks abandoned their own lending standards to approve unjustified loans, leading to record defaults and foreclosures. Investors who owned the mortgages began scouring the loans for defects and lodging claims, while homeowners and state attorneys general alleged that banks based seizures on missing or false documents. Litigation costs for JPMorgan alone have come to more than $5 billion.

Bank of America, whose Countrywide unit was the biggest lender during the housing bubble, had $1.18 billion in third-quarter costs, according to its Oct. 18 report. That included a $278 million provision for repurchases, $500 million for litigation costs and $400 million for waivers and assessments related to foreclosure problems. The total for the Charlotte, N.C.-based company since 2007 is now $40.3 billion, the most of any U.S. home lender.

Wells Fargo added $390 million to its reserves for repurchases in the third quarter, bringing its total to $5.48 billion. The San Francisco-based company, the biggest U.S. home lender, also wrote down the value of its mortgage-servicing rights by $2.64 billion, in part because of expenses "including delinquency and foreclosure costs."

The write-down was excluded from Bloomberg's tally because the bank didn't say how much of the decline was attributable to extraordinary foreclosure costs, and Ancel Martinez, a Wells Fargo spokesman, declined to elaborate.

Citigroup reported a $301 million provision for repurchase demands, lifting the New York-based bank's total to $2.2 billion.

Thomas Kelly at JPMorgan, Shannon Bell at Citigroup and Jerry Dubrowski, a Bank of America spokesman, declined to comment. Ally Financial, previously known as GMAC, has not reported its third-quarter data yet. As of the second quarter, the Detroit-based lender had been hit with $3.28 billion in costs. Ally is 74 percent owned by the U.S. government after being rescued from collapse in 2008.

Fannie Mae and Freddie Mac, which were also bailed out, say they're getting tougher in demanding repurchases, even for loans that have not gone into default. Some guarantees offered by banks oblige them to give refunds merely if the underwriting was defective, even if the borrower is still paying.

"Fannie Mae in particular seems to be getting more aggressive," FBR's Miller said. Bank of America said it had $11.67 billion in outstanding claims and JPMorgan had $3.09 billion.

Bloomberg's tally was compiled from regulatory filings, company statements and financial presentations by the nation's five biggest mortgage lenders. The data cover provisions and expenses attributable to repurchases, foreclosure errors and abuses, payments to reimburse investors for lost value on faulty mortgages, legal settlements and litigation expenses.

The compilation also includes write-downs of assets, such as mortgage-servicing rights, when the company attributed the loss in value to problems in mortgage underwriting or foreclosures and the costs of remedies.

The tally would be higher if it included settlements with the U.S. Securities and Exchange Commission.

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