The world’s biggest banks are facing a bigger payout to the U.S. government over bad mortgages than originally estimated, with HSBC on Monday acknowledging it might have to pay $1.6bn in damages.
HSBC made the disclosure in a filing alongside its quarterly results and said discovery was “proceeding apace” in the case against it from the Federal Housing Finance Agency, the government regulator that oversees Fannie Mae and Freddie Mac.
HSBC made the disclosure in a filing alongside its quarterly results and said discovery was “proceeding apace” in the case against it from the Federal Housing Finance Agency, the government regulator that oversees Fannie Mae and Freddie Mac.
FHFA sued 18 international financial groups in 2011, alleging they broke federal securities laws in selling mortgage-backed securities whose underlying loans did not comply with contractual guarantees to Fannie and Freddie, the mortgage agencies seized by the government in 2008 to prevent their impending failure.
Fannie and Freddie bought $200bn of MBS, the FHFA said in its lawsuits, which later suffered a sharp decline in value as houseowners began to default on their loans.
The damages outlined by HSBC are higher than forecast. “It is possible that these damages could be as high as $1.6bn,” the bank said.
Analysts at Credit Suisse had pegged the settlement at about $900m.
They are also higher as a proportion of the $6.2bn stated value of the securities than a recent settlement with UBS.
If applied to some of the defendants with the biggest exposure, such as Bank of America, JPMorgan Chase and Royal Bank of Scotland, their final bill would be more than $7bn each.
If they paid in proportion with the UBS deal, they would pay more than $4bn each. Even the smaller sum is a much higher recovery than is typical in similar claims and higher than analysts had forecast.
Every security is different, and it is possible that lawyers for other banks could secure a better deal or refuse to settle and win outright in court.
But people involved in the case – on both sides – agree that it has turned against the banks, although some dispute the legitimacy of procedural rulings that have gone the way of the government.
In most of the cases, filed by Quinn Emanuel and Kasowitz law firms on behalf of FHFA, the government said it was seeking either “hundreds of millions” of dollars in compensation, as in the case of HSBC, or “billions” for banks which sold more MBS.
Since the cases were filed, the market for MBS has recovered, reducing the potential losses.
But the government has also won court battles, limiting the banks’ main argument that Fannie and Freddie were the most informed mortgage investors in the country and were well aware of the risks they were taking on.
In the UBS case, original losses were estimated at about $1.15bn. As the market recovered with the improving economy, these were reduced to about $900m, said people familiar with the case.
The Swiss bank eventually agreed to pay $885m or more than 90 per cent of the estimated losses.
