Mortgage Debacle Costs Banks $66B

Faulty mortgages and foreclosure abuses have cost the nation’s five biggest home lenders at least $65.7 billion, according to a tally by Bloomberg News, and new claims may push the industrywide total to twice that amount.

This is how they lost the money.

Banks typically made home loans 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.

“As large as that number is, it’s a small fraction of the overall economic damage that the crisis and these mortgages caused to the economy,” said Litan, who was on a commission that investigated the savings and loan crisis in the 1980s. “There were trillions of dollars of damage.”

The FHFA lawsuit cited the prospectus for one mortgage- backed security underwritten by Bank of America entities, which said no loans were larger than the underlying value of the homes. In fact, 11 percent of loans sampled by the agency fit that description, the suit said. Another securitization said 4.45 percent of the homes weren’t owner-occupied, while the true percentage was 15.27 percent, according to the suit.

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