Mortgage lenders still on the hook
The $25 billion mortgage settlement that will ease the pain for many borrowers doesn't liberate lenders from future losses or years of litigation.
This post comes from partner siteBloomberg Businessweek.
U.S. lenders, including Bank of America, still face years of litigation and billions of dollars in liabilities tied to the housing collapse after agreeing to settle a probe of abusive foreclosure practices.
Government officials can pursue claims related to the packaging of loans into securities, criminal-enforcement actions and fair-lending violations, U.S. Attorney General Eric Holder said Thursday. The $25 billion deal with the five biggest servicers ends state and federal probes into shoddy foreclosures and pays for debt forgiveness, refinancing and other efforts to keep struggling homeowners in their properties.
"It's a big check with narrow immunity," said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and now an analyst with FBR Capital Markets in Arlington, Va. "You get the state attorneys general off your back, but you're not getting immunity from securitizations, which could come with their own steep cost down the road."
Banks including JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial negotiated with regulators for 16 months to seek the broadest possible release from claims tied to the creation and servicing of mortgages. They agreed to a deal that doesn't liberate them from further losses.
"Because of the narrow nature and the fact that the banks didn't get the widespread assurances they were seeking, this was mostly meaningless," said David Lykken, a managing partner at Mortgage Banking Solutions, an Austin, Texas-based consulting firm.
President Barack Obama announced during his State of the Union speech last month the creation of a government unit to investigate misconduct in the bundling of mortgage loans into securities. The group will streamline and strengthen current efforts to investigate fraud, Holder said Jan. 27.
Regulators are "aggressive" on pursuing securities claims and created a task force to do so, said Department of Housing and Urban Development Secretary Shaun Donovan. The deal doesn't protect banks from claims related to creating defective loans sold to government-owned Fannie Mae and Freddie Mac, he said.
"It wasn't the servicing practices that created the bubble, nor caused its collapse," Donovan said. "It was the origination and securitization of these horrendous products." Post continues below.
Another area that isn't restricted by the settlement: the right of states to pursue claims over banks' use of a mortgage database during foreclosures. New York Attorney General Eric Schneiderman filed a suit this month alleging that the lenders misled homeowners, undermined foreclosure proceedings and created uncertainty about ownership interests in properties by using the Reston, Va.-based Mortgage Electronic Registration System, or MERS, to manage loans.
While banks have largely reserved for costs from the deal announced Thursday, bigger lenders may still face as much as $2 billion a quarter in legal expenses, said Richard Bove, a bank analyst at Rochdale Securities, in an interview with Bloomberg Television. He compared lenders' predicament to that faced by tobacco and asbestos firms after government agreements.
"What we're going to see for the next five to seven years is these lawsuits going through court after court," Bove said.
The five biggest home lenders had $72 billion of costs tied to repurchases, litigation, foreclosures and errors on faulty mortgages since 2007, with Bank of America paying the most. Investors who buy loans are entitled to ask for refunds or compensation if they find missing or inaccurate data on home values or the borrower's income.
A complex task
"If you think about the overall housing market, there's a wide array of issues, and no one action is going to put all of that to a close," Mike Heid, the president of mortgages for San Francisco-based Wells Fargo, said in an interview. "Today's settlement is a big step forward in a very substantial and meaningful piece of the business."
Adhering to the settlement provisions will be a challenge for banks, said Terry Moore, a managing director at Accenture. Bank of America, struggling to handle mortgage refinancing after a U.S. program boosted demand, told some customers they must wait 90 days before starting an application.
"The work flow that's required and the loan level that needs to be researched and understood in order to look at the individual borrower's situation, it's a complex task, and it requires skill and resources," Moore said.
Citigroup, the third-biggest U.S. bank, said it will adjust its fourth-quarter and full-year results to reflect an $84 million after-tax charge related to the settlement. The firm accounted for $2.2 billion of the settlement. Citigroup will record an additional $125 million after-tax charge to the results "in connection with the resolution of related mortgage litigation," according to the statement.
Dan Frahm, a spokesman for Charlotte, N.C.-based Bank of America, Ally spokeswoman Gina Proia and Kristin Lemkau of New York-based JPMorgan Chase declined to comment on banks' expected costs. Mark Rodgers of New York-based Citigroup didn't respond to emails seeking comment.
More on Bloomberg Businessweek and MSN Money:
- Missed Super Bowl, frantic talks led to $25 billion bank deal
- $25 billion mortgage deal: What does it mean to you?
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