The fallout from the subprime mortgage crisis continues to plague U.S. banks, according to Standard and Poor's, with the ratings agency estimating billions of dollars in extra litigation fees may hit major lenders.
In the lead-up to the financial crash of 2008, U.S. banks packaged and sold residential mortgage-backed securities - a type of financial instrument that contained mortgages and home-equity loans of varying risk. Once homeowners in the U.S. started defaulting on their loans in record numbers in 2007, the market for mortgage backed securities collapsed as it became impossible to tell whether the debt in the security was high- or low-risk, sparking the global financial crisis.
This month JPMorgan agreed to pay $13 billion to settle charges that it misrepresented the quality of mortgages it sold in these securities. Meanwhile, the legal wrangling over Bank of America's proposed settlement of $8.5 billion is yet to be completed. S&P now believe that more banks could be set to face extra payouts.
"We estimate that the largest banks may need to pay out an additional $55 billion to $105 billion to settle mortgage-related issues," Stuart Plesser, a credit analyst at the ratings agency said in a press release late on Tuesday.