Ten of the country’s biggest retail banks have finally cleared their names with regulators who alleged that the banks’ improper foreclosure practices resulted in thousands of American homeowners losing their homes.  The banks will pay $3.3 billion in cash to more than 3.8 million borrowers whose homes were foreclosed in 2009 and 2010 and will also set aside an additional $5.2 billion to modify loans of existing customers in a bid to undo some of the damage done to customers due to ‘robosigning’ by bank employees. The banks that are a part of this agreement are Aurora Bank, Bank of America (NYSE:BAC), Citibank (NYSE:C), JPMorgan Chase (NYSE:JPM), MetLife Bank (NYSE:MET), PNC (NYSE:PNC), Sovereign Bank, SunTrust Bank (NYSE:STI), U.S. Bank (NYSE:USB) and Wells Fargo (NYSE:WFC). Ally Financial, HSBC (NYSE:HBC), OneWest Bank and Everbank (NYSE:EVER) are yet to settle with the regulators. 
Since the economic downturn of 2008, U.S. regulators including the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board have doggedly pursued the country’s 14 biggest mortgage lenders alleging that at the peak of the housing bubble these banks overlooked standard industry practices that ensure that mortgages are only given out to individuals who are actually capable of repaying them. As far as the banks were concerned, their sub-prime lending activities were justified because of the then-prevailing notion that even if the homeowners were unable to make good on their loan payments, continued appreciation in home prices would ensure that their lending operations book no losses.
- How Much In Outstanding Mortgage Loans Did The Largest U.S. Banks Service As Of Q2?
- How Have Third-Party Mortgage Servicing Portfolios For The Largest U.S. Banks Changed In The Last 5 Quarters?
- How Have Card Charge-Off Rates For The Largest U.S. Card Issuers Changed In The Last 5 Quarters?
- What Are The Card Charge-Off Rates For The Largest U.S. Card Issuers?
- How Has The Total Loan Portfolio For The U.S. Banking Industry Changed Over The Last 5 Quarters?
- How Do The Loan Books Of The 5 Largest U.S. Banks Differ In Terms Of Loan Types?
The banks are still reeling under the impact of the recession which was essentially triggered when the housing bubble burst – with the biggest among them facing a string of multi-billion dollar lawsuits for their mortgage origination & securitization practices.
This is, however, not the first major settlement by the banks with regulators over improper foreclosure practices. Last March, five of the biggest mortgage lenders – Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial – had settled differences with 49 states and various federal agencies over the same issue for a staggering $25 billion (see Foreclosure Settlement Makes it to Federal Court for Approval). Bank of America foot the largest share of this bill which included $5 billion in fines, $17 billion to provide principal relief and other assistance to affected borrowers and $3 billion for refinancing outstanding mortgages.
The recently announced settlement should ideally get the banks off the hook in the entire robosigning mess, with each of the ten banks pitching in with their share. The banks have also individually released information about the impact of the settlement on their business. Bank of America’s settlement amount as a part of this deal is $2.5 billion. 
Wells Fargo’s share of the cash settlement in $766 million besides $1.2 billion for foreclosure prevention actions.  Citigroup mentions that its share of the settlement is about $500 million.  As for U.S. Bancorp, the settlement entails a $80 million cash payment and $128 million refinancing reserves for a total bill of $208 million. ((U.S. Bancorp Issues Statement in Response to Independent Foreclosure Review Settlement Agreement, U.S. Bancorp Press Releases, Jan 7 2013))
No doubt, the settlement will impact the banks’ Q4 2012 results. You can understand the impact of an increase in non-interest expenses on U.S. Bancorp’s share value by making changes to the chart above.Notes:
- Independent Foreclosure Review to Provide $3.3 Billion in Payments, $5.2 Billion in Mortgage Assistance, Federal Reserve Press Releases, Jan 7 2013 [↩]
- Banks, Regulators Reach Foreclosure Settlement, The Wall Street Journal, Jan 7 2013 [↩]
- Bank of America Announces Settlement with Fannie Mae to Resolve Agency Mortgage Repurchase Claims on Loans Originated and Sold Directly to Fannie Mae Through December 31, 2008, Bank of America Press Releases, Jan 7 2013 [↩]
- Wells Fargo Provides Statement on Independent Foreclosure Review Agreement Reached Today, Wells Fargo Press Releases, Jan 7 2013 [↩]
- Citi Statement on Independent Foreclosure Review Agreement in Principle, Citigroup Press Releases, Jan 7 2013 [↩]