The Congressional Oversight Panel estimates that the risk to banks stemming from poorly assembled mortgage securities sold to investors runs in the $52 billion range, a cost that’s in the ballpark of previous estimates from the private sector, as Fortune points out.
But just because the government hasn’t raised any alarm about a new, gigantic mortgage liability for the banking system doesn’t mean everything’s hunky dory:
However, there are scenarios whereby wholesale title and legal documentation problems for the bulk of outstanding mortgages could create significant instability in the marketplace, leading to potentially significantly larger effects on the balance sheets of banks. Under significantly more severe scenarios that would engulf the broader mortgage market – encompassing widespread legal uncertainty regarding mortgage loan documentation as well as the prospect of extensive put-backs impacting agency and private label mortgages – bank capital levels could conceivably come under renewed stress, particularly for the most exposed institutions.
The Panel points out that if enough major investors come after a given major bank, its capital levels could take a significant hit. As such, it’s proposing additional stress tests on the banks. Meanwhile, the Fed has made it clear it’s not about to let the banks roam free in the current economic environment. As more and more kinks emerge, it’s beginning to look like it’ll be a while before our major financial institutions get out from under government’s thumb.
mtaylor [at] observer.com | @mbrookstaylor