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Wells Fargo, JPMorgan Won't Drown in Mortgage Muck: Street Whispers

In a worst case scenario, Cannon of KBW projects a settlement as high as $770 million. Using a previous Deutsche Bank settlement on FHA insurance, Cannon estimates a range of damages between $104.5 million and $423.5 million, with the mid-point expected at $264 million.

"This is certainly a negative for Wells Fargo but we believe that the lawsuit will be settled and the exposure is manageable," writes Cannon, in a Wednesday note to clients. The analyst adds its still unclear is whether Wells Fargo is reserved against FHA claims and highlights the bank's strong worded response as a positive.

"Wells Fargo denies the allegations and believes it acted in good faith and in compliance with Federal Housing Administration (FHA) and Department of Housing and Urban Development (HUD) rules," said Wells Fargo, in a statement reeased to TheStreet on Wednesday, which also highlighted the banks FHA delinquency rates have been as low as half the industry average. "The Bank will present facts to vigorously defend itself against this action," the bank added.

For its part, JPMorgan has already proven it can overcome giant one-time charges, while remaining profitable. In the second quarter, the bank booked a $5.8 billion loss tied to a misguided holding of illiquid credit products - now known as the London Whale trade - but the bank remained solidly profitable posting $5 billion in net income. After a near 20% stock dive on revelations on the trading position and an expected loss that may now reach as much as $7.8 billion, JPMorgan shares rallied in the third quarter, gaining back most of its stock drop.

Although investors in Wells Fargo and JPMorgan may be taken aback by the claims made in the respective October suits filed against both banks, bruised reputations aside, the issues don't appear to pose a big earnings risk. In contrast the weaker earnings and balance sheet uncertainties of Bank of America and Citigroup give investors good cause to remain vigilant about the impact of legal settlements and one-time accounting charges.

For more on the legal challenges of America's largest banks, see why Bank of America investors should expect the unexpected and why Wall Street is still skeptical Citigroup CEO Vikram Pandit's strategy can resolve the bank's lingering problems.

-- Written by Antoine Gara in New York

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