Lawsuits highlight fallout risks from mortgage crisis
Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), JP Morgan Chase (NYSE:JPM) and others are facing mounting legal action over their role in the subprime mortgage crisis, highlighting ongoing risk to the lenders from the U.S. housing collapse.
Early in December, Massachusetts Attorney General Martha Coakley said she’s suing five banks, including Wells Fargo and J.P. Morgan Chase, over alleged “unlawful and deceptive conduct” in the foreclosure process. News of the suit triggered a sell off in financial stocks, making them the worst performers in the S&P 500 on the day. [1]
After that, the Orange County, California-based Avid Law Center said it’s taking action against Wells Fargo and Bank of America citing potential violations such as improper securitization of homeowners’ loans, the refusal to honor a loan modification and loan service interference in contractual relations.
The mounting number of lawsuits are creating a legal headache for the nation’s biggest banks and may result in significant liabilities as homeowners seek to clawback losses. They also come amid predictions the housing crisis isn’t even halfway through.
Wells Fargo may have most at stake. Mortgage lending makes up 25% of the Trefis valuation for the stock, making it the most important division. Trefis has a $30 target price for the bank, some 10% above the current market price.
The shares are currently trading close to the bottom of their 52-week range, with recent forecasts giving little cause for optimism for any imminent rebound in the U.S. housing market.
See the full Trefis analysis for Wells Fargo and JPMorgan
The latest figures from the Mortgage Bankers Association show that while the delinquency rate for mortgages in the third quarter dropped to the lowest level since the fourth quarter of 2008, foreclosures rose, with the percentage of loans in the foreclosure process at 4.43% up four basis points from a year ago.
The association counts loans that are at least one payment past due but aren’t in the process of foreclosure to calculate its rates. [2]
Mortgages play a much smaller role in Bank of America’s stock price valuation at just 5.1%, according to Trefis. They make up 1.7% of J.P. Morgan’s valuation.
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