US banks’ $20bn bill for subprime mortgage fiasco

Ten US banks are to pay more than $20bn (£12.6bn, €15bn) to the government mortgage agency Fannie Mae and mortgage holders who suffered when the subprime market collapsed.

Fannie Mae’s case was that the lenders, including Bank of America, JPMorgan Chase, Citigroup and Wells Fargo, abused the foreclosure system that allowed banks to seize homes from defaulting borrowers.

The lenders had sold on their loan investments, which then dived in value when the holders could not repay, causing the financial crisis of 2008. Fannie Mae argued that the debts were toxic and the banks were responsible for the losses.

Bank of America is paying $10.3bn to cover loans-related claims and $1.3bn compensation to Fannie Mae. The claims consists of a $3.55bn cash payment and $6.75bn for repurchasing around 30,000 loans. The ten banks are together paying another $3.3bn directly to homeowners, some of whom the regulators said should not have lost their properties, and $5.2bn for loan assistance and write-offs.

Bill Brown, a law professor and financial services expert at Duke University, North Carolina, said the Fannie Mae settlement drew a line under the subprime mortgage-backed securities dispute. “About a year or two ago, there were many people worried that this line would not even start to be drawn. Right now, we’re 90% of the way to finishing the line.”

The agreement concerns loans worth $1.4tn, and outstanding balances are $300bn.

Fannie Mae and Freddie Mac, a second government mortgage agency involved, together lost more than $30bn, partly because of their subprime loan investments, and were bailed out by the government. US taxpayers have since spent more than $140bn to keep them afloat. Bank of America settled with Freddie Mac in 2011.

There are, nevertheless, unresolved actions. In October, the government sued Bank of America for mortgage fraud by selling toxic home loans to Fannie Mae and Freddie Mac through its subsidiary Countrywide Financial.

The government took similar action against JPMorgan Chase and Wells Fargo, accusing the former of defrauding investors who lost more than $20bn on mortgage-backed securities sold by Bear Stearns.

JPMorgan Chase replies that the allegations relate to Bear Stearns’ activities before it bought the lender in March 2008.