The eight biggest US banks, including JPMorgan and Bank of America may need to spend an extra $104 billion to settle mortgage-related issues. That’s two thirds of $154.9 billion banks’ reserves that they accumulated to stand the potential legal costs.
The major US banks may have to pay an additional penalty of between $56.5 billion and $104 billion in potential mortgage payouts, according to the rating agency Standard & Poor's.
"Notably, mortgage-related litigation has recently gotten a second wind and has expanded beyond investor claims," S&P credit analysts led by Stuart Plesser wrote in a report.
However, the lenders under fire have accumulated $154.9 billion in the form of a so-called “safety pillow”, expecting a new wave of indictments from investors wanting compensation for mortgage-backed securities made up of bad loans.
Earlier this month JPMorgan agreed final details of its record $13 billion settlement for selling "bad loans" before the US financial crisis. This is the biggest penalty of a financial firm in U.S. history.
Meanwhile, a similar $8.5 billion settlement between Bank of America and 22 institutional investors has been under consideration in a New York district court since June 2011, Reuters reports.
The legal expenses have already affected the third-quarter profit of U.S. banks. The Federal Deposit Insurance Corporation (FDIC) reported that the total net income of its insured banks fell by $1.5 billion to $36 billion in the third quarter, which is the first year-on-year decline since the second quarter of 2009.
JPMorgan was a big contributor in that decline. In October the bank reported its first loss since 2004, following a $7.2 billion penalty for mis-selling mortgage-backed securities.
The negative impact of legal expenses on bank’s bottom line wont' affect its ratings as the risks are already calculated into the equation.
"Despite the substantial legal costs already incurred and the raft of new legal issues, we currently don't expect legal settlements to result in negative rating actions for the U.S. banks with the largest legal exposure," the S&P report said.