Faulty mortgage loans catch up with 17 big banks

Bank of America faces three FHFA lawsuits, covering losses on more than $57 billion of securities. JPMorgan faces claims related to $33 billion of securities and Royal Bank of Scotland was sued over $30.4 billion of securities.

Several large banks are also negotiating with all 50 U.S. state attorneys general on a comprehensive settlement to address mortgage abuses and limit future mortgage litigation.

"This new litigation could disrupt the AG settlement,'' said Anthony Sanders, finance professor at George Mason University and a former mortgage bond strategist.

Banks might resist settling if they knew litigation from other regulators could deplete capital, he said.

Before the FHFA lawsuits had even hit a court docket, financial experts offered blunt expectations for the outcome.

"The lawsuits will be settled,'' said Sean Egan, managing director of Egan-Jones Ratings Co, an independent credit ratings firm. ``The end result will be a further outflow of cash from the banks, and more importantly an additional black eye.''

A TWIST

FHFA director Edward DeMarco is looking to minimize future losses for Fannie Mae and Freddie Mac, which are owned by the government after being seized on Sept. 7, 2008.

The FHFA filed the suits before a three-year statute of limitations expired. Fannie Mae and Freddie Mac are pillars of U.S. mortgage finance.

Wells Fargo & Co, the largest U.S. bank not sued by the FHFA, entered a ``tolling'' agreement waiving its right to claim the FHFA waited too long to sue, a person with knowledge of the matter said. The bank said Wells Fargo might have done this to give it time negotiate its own settlement, the person added.

FHFA spokeswoman Corinne Russell and Wells Fargo spokeswoman Mary Eshet declined to comment.

The KBW Bank Index closed down 4.5 percent Friday, nearly doubling the losses of the broader market. Bank of America led the index lower, dropping 8.3 percent.

Bank shares also came under pressure from signs the Federal Reserve could start selling short-term debt on its books and buy long-dated bonds to push longer-term yields lower.

Such a move, known as ``operation twist,'' would hurt banks whose profit margin is tied to the short-term rates at which they fund and the longer-term rates at which they invest.

Major banks already face potential payouts of tens of billions of dollars to settle regulatory charges of abusive mortgage lending and foreclosure practices, and other investor lawsuits over mortgage debt losses.

Such payouts would reduce earnings and weaken capital levels, perhaps harming the ability of banks to lend money and provide much-needed life to a stalled housing market and weakened economy.

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