Ever since the 2008 subprime mortgage crisis related to residential mortgage-backed securities (RMBS), banks have been having significant difficulty with their investment banking divisions and facing massive lawsuits related to the downturn. Wells Fargo (NYSE:WFC) until now has managed better than competitors like Bank of America (NYSE:BAC), Citigroup (NYSE:C), Goldman Sachs (NYSE:GS) and JPMorgan NYSE:JPM), which face a long list of lawsuits over the widespread mortgage-backed securities fiasco. But things don’t look as bright for the country’s largest home lender anymore. The Securities and Exchange Commission (SEC) has requested a federal judge to force Wells Fargo to cooperate in an investigation over its sale of RMBS worth almost $60 billion.  This is bad news for the bank, which draws more than one-fifth of its value from its mortgage operations.
We are currently in the process of updating our $31 price estimate for Wells Fargo’s stock in the wake of the bank’s decision to increase its dividend payout.
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The SEC is investigating a possible misrepresentation and omission of facts by Wells Fargo in the RMBS that it offered from September 2006 until early 2008. The regulatory agency sent the bank notices requesting for information about its underwriting guidelines and due diligence, and is stepping up its action by involving the federal court in procuring this information.
Legacy mortgage issues continue to plague the banks with both small and large investors targeting them over the loss-making securities that were purchased before 2008. The most notable among these is the series of lawsuits the Federal Housing Finance Agency’s (FHFA) filed against 17 financial institutions to court over losses to Fannie Mae and Freddie Mac. Wells Fargo was the only major bank not to be named in these lawsuits.
But the fact that mortgages and foreclosures were allegedly misrepresented by financial institutions can also not be overlooked as estimates already value the losses to the top 5 banks at more than $65 billion as a result of the mortgage debacle. A significantly bigger number is also being fought over in numerous lawsuits.
If the SEC does conclude wrongdoings on Wells Fargo’s part, the bank may end up making a multi-billion dollar settlement – enough to significantly damage its generally stable income statement, not to mention its reputation.Notes:
- Wells Fargo Should Be Forced to Meet Subpoenas, SEC Says, Bloomberg, Mar 24 [↩]