Banks expected to experience more mortgage losses

A recent report from Paul Miller, bank analyst of FBR Capital Markets, predicts a new federal housing insurance program may deny bank claims for money lost in home loan foreclosures. This could result in another $13.5 billion in estimated mortgage-related losses to the major U.S. financial institutions.

Reuters reported that the three banks at risk to experience the biggest losses as a result of the new program are Bank of America, JPMorgan Chase and Wells Fargo. Miller wrote in the report that the Federal Housing Authority is facing financial pressure to deny the claims of the banks, that in the past have been automatically paid. Miller expects claims from the FHA will be the next sector affected by the program, as banks have already been hit by claims from Fannie Mae and Freddie Mac, due to the selling of bad mortgage loans and securities.

According to Miller, mortgage lenders could be hit with $13.5 billion in losses if the federal agency blames the banks for the mistakes in the mortgage deals, or the FHA may deny claims based on mistakes in lending that could total $11.5 billion in losses. Miller expects Wells Fargo to lose $3 billion, JP Morgan to be out $1 billion and Bank of America to suffer a loss of $2 billion, the news source reported.

In addition, Sealink Funding Limited recently filed a multi-billion dollar lawsuit against Bank of America and JPMorgan Chase for poor underwritten mortgages. The company is suing JPMorgan for $2.4 billion worth of mortgage securities purchased between 2005 and 2007, and Bank of America for $1.6 billion in mortgage securities the bank sold during the same time frame, Housing Wire reported.

Sealink claims the originators of the loans did not practice rigid underwriting processes and violated their stated underwriting guidelines when selling the securities. The company said the value of the mortgage securities purchased were misrepresented and caused harm to the investors in the transaction, the news source reported.

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