01.07.13

Banks Settle Mortgage Investigations with Nearly $20 Billion in Payments

On Monday, authorities and banks announced two massive settlements to put to bed allegations over misdeeds in mortgage lending and foreclosures. Are America’s financial institutions finally putting the mortgage mess behind them?

Another day, another couple of multibillion-dollar settlements with regulators from a group of banks.

First, Bank of America atoned for credit-bubble-era excesses by agreeing to a $11.6 billion settlement with mortgage giant Fannie Mae. The bank agreed to buy back $6.75 billion worth of mortgages it had sold to Fannie Mae during the housing bubble that didn’t meet Fannie Mae’s underwriting standards, and to pay back $4.85 billion to the wronged agency.

Second, a group of banks, including giants such as Bank of America, Citi, Wells Fargo, and JPMorgan Chase, agreed to pay a financial penalty for post-bust behavior. To settle accusations that they improperly reviewed foreclosures and mishandled loan modifications in 2009 and 2010, the banks inked a settlement with the Office of the Comptroller of the Currency and the Federal Reserve, worth $8.5 billion—$3.3 billion in payments to certain mortgage borrowers and $5.2 billion worth of mortgage relief, including loan modifications.

These settlements underline a trend among U.S. banks, especially big ones: they are putting the recent and not-so-recent past behind them, because they are profitable enough to do so. Although the settlements hardly end the legal liabilities faced by the banks over the housing boom and “robo-signing” scandals, they represent a significant milestone nonetheless.

It’s no coincidence that these payouts come after financial stocks have just closed out a strikingly successful year, even Bank of America. The banks that did participate in the settlement tend to be relatively healthy. Ally Financial, one of the biggest mortgage lenders during the boom years, whose mortgage unit ResCap filed for bankruptcy and is still majority controlled by the U.S. Treasury, did not participate.

Today’s settlement adds on to the $25 billion mortgage settlement signed by 49 state attorneys general, the federal government, and five of the largest mortgage banks. These latest settlements provide some closure for many of these banks. Of course, that might not be the case for actual homeowners who may have been improperly foreclosed on. Although today’s settlement does provide for both cash payments and loan modifications for a wide range of borrowers, it can’t actually reverse any wrongful foreclosures. It also puts to an end a government-mandated review of loan files, so it does not clear up how much, if any, wrongdoing these banks were up to.

From 2010 through today, Citi, Bank of America, and JPMorgan Chase have put aside around $30 billion in reserves to pay out litigation. While Citi has not exactly been an example of managerial stability, it is still steadily shedding bad assets and is not, for now, headed toward a breakup, bailout, sale, or bankruptcy. JPMorgan and Wells Fargo, who participated in the settlement, have been running up big profits from mortgage originating, making more than $3 billion in profit in the third quarter of last year.

In so much as today’s settlements underline future litigation over foreclosures, it may allow banks to ramp up profitable activities even further. In coming quarters, banks may be able to reclaim some of the cash they had put in reserve to deal with legal issues. What’s more, the settlements may also get rid of legal barriers to originating mortgages and packaging and selling them to Fannie Mae and Freddie Mac. Bank of America, for instance, was caught in a long-running legal dispute because of the legal troubles it inherited from the failed mortgage giant Countrywide, which it had acquired in 2008. 

These settlements underline a trend among U.S. banks, especially big ones: they are putting the recent and not-so-recent past behind them, because they are profitable enough to do so.

In recent years, Bank of America slowed its buybacks of loans from Fannie Mae, and in February 2012 stopped selling new loans to Fannie. In the course of settling tens of billions of dollars' worth of litigation from the GSEs, insurers, and investors, Bank of America has shrunk its balance sheet and decreased its presence in the more far-flung sectors of the mortgage market—even as its competitors, like Wells Fargo and JPMorgan, have been making tens of billions originating and servicing mortgages. Some analysts upped their rating of Bank of America’s stock on today’s settlement.

Bank of America is also selling off some of its mortgage-servicing rights to raise money for its separate $11.6 billion settlement with Fannie. The company is, however, hiring mortgage underwriters, perhaps indicating a focus on simple mortgage lending. And while the shoddy loans and careless foreclosure reviews that haunt America’s banks seem out to prove Faulkner’s dictum that “The past is never dead. It’s not even past,” today’s settlements are a sign that banks are starting to bury the past and look toward the future.