Banks Face Another Mortgage Crisis

JUST WHEN AMERICA'S MAJOR BANKS seem to be back on their feet, having paid back federal bailout money and cranked up their employee bonus programs, a new threat has emerged that could seriously affect their earnings power over the next few years.

The potential liability facing bankers arises from the $2 trillion in subprime, alt-A and option-adjustable rate mortgages that they underwrote and sold to investors, mostly as mortgage-backed securities during the home-lending boom of 2005 to 2007. The losses on the mortgages will be horrendous before the dust settles—over $700 billion on these and other so-called nonagency mortgage securities, according to New York mortgage-research specialist and broker Amherst Securities Group.

And now investors—from the federal housing giants Fannie Mae (ticker: FNMA) and Freddie Mac (FMCC) to major bond managers like closely held Pacific Investment Management and BlackRock (BLK)—are fighting back. They are seeking to put back the mortgages to the banks from whence the investment flotsam came and force the banks to eat much of the mortgage losses.

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Banks Face Another Mortgage Crisis