The legal headaches for the big banks over mortgages only grow after JPMorgan's (JPM -0.1%) $5,1B settlement with the FHFA - 12% of the original purchase amount. "My sense is, the industry is concerned about what’s happened,” says law professor Carl Tobias. “The size of the JPM settlement made people wake up and be more concerned than they were before.”
Fourteen banks still have similar suits pending with the FHFA, but most-exposed is Bank of America (BAC +0.5%). ISI's Glenn Schorr extrapolates the JPMorgan settlement and figures BofA will have to pay $6.8B, well beyond $5.1B in legal reserves (BofA disclosed last week that losses could go beyond this). Goldman (GS +0.1%) and Morgan Stanley (MS +0.3%) would be on the hook for $1.3B each, says Schorr, and Morgan analyst Betsey Graseck cut her estimates for both BofA and Goldman last week.
FHFA holds plenty of sway to get that 12% payout, but private investors have typically only gotten back 2% - looking at the government's fat payout might encourage them to lobby for a boost.
Then there's a new tool for prosecutors - a law called the Financial Institutions Reform, Recovery and Enforcement Act, or Firrea - "another arrow in the quiver of prosecutors, and it’s worked," says Tobias. It was central to a loss for BofA last month in a lawsuit over mortgages sold to the GSEs. Among its twists is a 10-year statute of limitations, and BofA discloses the DOJ is employing Firrea in a new suit about a certain 2008 mortgage offering.