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Wells Fargo's Potential Legal Losses Increased in Second Quarter

By Matthias Rieker At Wells Fargo & Co. (WFC), the potential losses from legal and mortgage-related issues rose in the second quarter--a sign residual trouble from the financial meltdown is easing but not over. So called "reasonably possible potential litigation losses" in excess of the bank's second-quarter legal reserves rose 30% from the first quarter, to as much as $1.2 billion, the San Francisco bank said in a quarterly filing with the Securities and Exchange Commission on Tuesday. Banks are not required to, and rarely do, disclose how much they reserve for potential losses from lawsuits, but the SEC requires them to disclose how much they might possibly lose in excess of their legal reserves. That sum is smaller at Wells than at its big-bank peers. But at Bank of America Corp. (BAC), the possible losses exceeding its reserve fell slightly in the second quarter from the first, to $4.1 billion, and at Citigroup Inc. (C) remained flat, at $4 billion. J.P. Morgan Chase & Co. (JPM) has not filed its comparable form yet, known as a 10-Q. Wells Fargo also disclosed Tuesday that possible losses from mortgages it had sold to investors but is now forced to take back because the borrowers are delinquent could exceed its reserves for such losses by $2.6 billion, a 13% increase from the first quarter. The bank said it booked a $34 -million loss from so-called mortgage putbacks in the second quarter, a 12% increase. Last month, Wells Fargo surprised analysts with a $669 million provision for mortgage-repurchase demands from Fannie Mae (FNMA), Freddie Mac (FMCC) and other investors, a 56% increase from the first quarter.
The increased provision was the result of "some communication very late in the quarter" with government-sponsored entities, Chief Financial Officer Timothy Sloan said during a conference call with investors. "We continue to see behavioral changes from the agencies," he said. Meanwhile, the government continues to investigate Wells Fargo's mortgage practices, the bank said Tuesday. Wells Fargo recently settled lawsuits alleging it violated fair-lending laws, claims the bank denies. Write to Matthias Rieker at matthias.rieker@dowjones.com

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