Major U.S. Banks Could Pay $16 Billion over MBS Claims

Major U.S. Banks Could Pay $16 Billion over MBS ClaimsApproximately $16 billion more in additional fines are set to be levied on financial institutions, as a result of soured loans sold to government-backed mortgage buyers Fannie Mae and Freddie Mac, according to MarketWatch. These banks include, but are not limited to major institutions Bank of America Corp. (NYSE: BAC) and Goldman Sachs Group Inc (NYSE: GS).

Taking into account institutions such as Morgan Stanley (NYSE: MS) which had recently settled its legal expenses, the additional settlements redound to about 12 percent to 13 percent of the original principal balance covering the mortgage-backed securities sold to Fannie Mae and Freddie Mac. The other banks may end up settling to the tune of $16 billion combined, assuming the settlement share remains as it is.

Aside from Morgan Stanley, which settled with the Federal Housing Finance Agency to the tune of $1.25 billion last week, six other financial institutions have settled their legal obligations, including another major institution, JPMorgan Chase & Co. (NYSE: JPM).

According to Columbia Law School professor John Coffee, most of the institutions will likely settle their obligations as part of a “herd”, so as not to be singled out in a pack. “It’s less individual culpability that way,” he added. Coffee also believes that the banks that have not settled, including Bank of America and Goldman Sachs, may also pay a similar percentage of 12 to 13 percent. The suit was filed by the FHFA in 2011, with 18 banks sued over securities that were repackaged to Fannie Mae and Freddie Mac that eventually went bad in the long term.

Bank of America, which refused to comment on the issue it is embroiled in, has two suits connected to Merrill Lynch and Countrywide, totaling $51.5 billion worth of mortgage-backed securities that it sold to the two government-backed agencies. If Bank of America pays 13 percent, this would redound to a settlement of about $7.4 billion.

As for Goldman Sachs, the bank sold $11.1 billion of these securities to Fannie and Freddie, which could mean a settlement of $1.44 billion. Goldman Sachs also refused to provide any comment.