Banks and other mortgage lenders could be on the hook for at least $97 billion because of the poor and possibly illegal handling of mortgages that surfaced during the current foreclosure mess, according to mortgage securities specialists.
The specialists—representatives from law firms and mortgage backed securities traders—told a gathering of prominent hedge funds in New York Wednesday that a wave of so-called putbacks was coming from these problematic home loans.
Putbacks occur when investors in mortgage-backed securities return individual home loans whose nature or handling violated their original terms to the companies who issued them—forcing those issuers to repurchase the loans at par.
Among those attending Wednesday's conference were hedge-fund companies Paulson & Co., Och-Ziff Capital Management, Fortress Investment Group, Caxton Associates, and King Street Capital Management, as well as attendees from insurance companies like MetLife and Prudential Financial, according to a list of attendees that was reviewed by CNBC.
Although many home lenders and securities packagers who trafficked in MBS during the mid-2000s are now defunct, some were absorbed by large banks like J.P. Morgan and Bank of America , potentially exposing those companies to investor payouts.
The liabilities have been hard to pin down, with one J.P. Morgan survey pegging the total industry losses at between $55 billion and $120 billion.
Laurie Goodman, a senior managing director at the MBS trader Amherst Securities, estimated in her presentation Wednesday that $97 billion was the total potential value of first-lien mortgages issued between 2005 and 2007 that could be returned to banks and other issuers.
But David Grais, the investor lawyer who helped organize the conference, suggested that "the top line number is considerably higher."
Still, some investors who attended said they were skeptical of those high figures, given the hurdles to bringing and proving putback cases.
And even losses totaling more than $100 billion are unlikely to cause major damage to bank stocks because analysts believe they have already been priced in for the damage.
"The impact as can best be determined will be to delay but not prevent banks from achieving their normalized earnings power," Dick Bove, banking analyst at Rochdale Securities, wrote in a research note earlier this month. "Book values are not expected to be lowered. The earnings disappointments inherent in this analysis may take 12 to 18 months to appear
Federal and state authorities, meanwhile, are investigating whether banks engaged in dubious or lax practices not only in issuing mortgages but in foreclosing on delinquent borrowers.
Such practices were blamed for contributing to a housing bubble that eventually burst and thrust the economy from 2007-2009 into the worst recession since the 1930s. Many Americans took out home loans that they didn't understand and bought homes that they couldn't afford.
As a result, foreclosures have soared to record highs and is one of the negative forces restraining the economy's ability to get back on sounder footing.