US States to Enter Foreclosure Settlement

A recent announcement regarding a possible settlement between banks and U.S. states over unscrupulous foreclosure practices may amount to less than the final word when it comes to …

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A recent announcement regarding a possible settlement between banks and U.S. states over unscrupulous foreclosure practices may amount to less than the final word when it comes to future litigation, according to experts. New York Attorney General Eric Schneiderman has since sued Bank of America, JPMorgan Chase and Wells Fargo over their use of the Mortgage Electronic Registration System, which is blamed for being the source of many foreclosure practice problems. This move combined with the fact that some states may not reach full agreement, and that any agreement will not guarantee a bar to future litigation, has both banks and investors concerned about the outcome. For more on this continue reading the following article from TheStreet.

A foreclosure settlement between the banks and the 50 states Monday, if it does finally happen, will likely not have the positive outcomes that investors have been hoping for.

Details of the deal emerging from recent press reports suggests that the states, while requiring banks to address their foreclosure procedures and reduce principal on mortgages, might not grant them any real immunity from future mortgage litigation.

That offers little comfort to investors who have been hoping that the settlement will provide some much-desired certainty on the scale and scope of the mortgage litigation facing banks.

"I am still concerned that the deal may not be as broad-based, or cover as many issues, as companies would hope for," KBW analyst Fred Cannon said. "A deal without Nevada or California would water down the settlement. And if MERS is up in the air, it is really difficult to have a meaningful settlement."

The New York Attorney General Eric Schneiderman on Friday sued Bank of America(BAC), JPMorgan Chase (JPM) and Wells Fargo(WFC) over their use of Mortgage Electronic Registration System or MERS, an electronic mortgage database, saying it resulted in deceptive and illegal practices, including false documents used in foreclosure proceedings.

The three banks, along with Citigroup(C) and Ally Financial are at the center of the year-long negotiations with the states over their allegedly deceptive foreclosure practices, including robo-signing.

The NY AG’s opposition to the deal was well known. "The New York AG’s action suggests that New York might not be participating in any servicer settlement. This would not be a surprise since the New York AG had always seemed reluctant to include origination related flaws as part of the settlement. However, even without New York, we believe that a national settlement would still be a meaningful positive for the industry," KBW analysts Bose George, Jade Rahmani and Ryan O’ Steen said in a report.

Still, the announcement came days after President Obama named Schneiderman as the lead investigator of a new mortgage fraud unit, which has fueled concerns that the lawsuits against banks will mount.

Massachusetts AG Martha Coakley in December already filed a lawsuit against the big five servicers for unlawful foreclosure practices and said she sought "real accountability’ from the banks.

Meanwhile, it remains unclear whether California Attorney General Kamala Harris will sign on to the deal. Harris has said the terms are inadequate and expressed concerns about the settlement interfering with her ability to pursue investigations against banks’ mortgage practices independently.

California’s participation in the settlement is crucial, however, as absent a deal, banks could see significant litigation from the state that has been severely affected by the housing bust.

On the flip side, other states are unlikely to agree to California getting more favorable terms, among the many issues that are weighing on the agreement.

Talks have frequently failed in the past year but expectations that a settlement will take place have climbed in recent weeks after some banks including Ally Financial took a charge in their fourth quarter for "foreclosure-related" matters. States also extended the deadline to sign on the deal to Monday Feb.6 from Friday, which has also raised hopes that they were close to a deal.

According to an Associated Press report earlier this month, the settlement , estimated at $25 billion, could bring significant relief to as many as 1 million struggling homeowners with private mortgages, with $17 billion likely to go towards reducing principals owed on mortgages.

Banks will get more credit for reducing principals on loans carried on their own books, according to reports. They can also reduce principals on loans held by investors if their contract allows them to do so.

About $5 billion of the settlement money would be placed in a reserve account for various federal and state programs. Checks of roughly $1,800 will be mailed to roughly 750,000 homeowners who were affected by wrongful foreclosure practices.

About $3 billion would go towards helping borrowers refinance at 5.25%, according to the report.

Banks have already likely provided for loan losses on potential principal reductions, so the settlement might not have an outsized impact on earnings according to FBR Capital Markets analyst Paul Miller.

But he doubts whether the deal will actually take place as banks were originally seeking immunity from liabilities across the mortgage space and are now walking away with considerably less.

More troubling is a Reuters report that suggests that states will set up a separate "monitoring committee" that will have the authority to take banks to court to enforce terms.

Miller says this could mean states could have more power in directing banks’ mortgage servicing. Banks have in the past often opposed states’ efforts to regulate them by arguing that national banking laws trumped state laws.

"I just don’t see a reason for the banks to sign on the dotted line," said Miller. "This gives the states a lot more power. It is inviting states to regulate them. And banks will still see future liabilities."

So we could still see another deadline go by with no settlement being reached, defusing some of the excitement in bank stocks.

Or we could see a more diluted settlement that exposes banks to litigation risk, which could come as a further disappointment to investors.

Miller believes bank stocks might likely rally on news of a settlement but investors should wait to see the terms of the deal before jumping in.

On Monday morning, shares of the big banks were trading weak as talks for a second bailout for Greece stalled. Shares of Bank of America were higher by 0.2%, while JPMorgan, Citigroup and Wells Fargo were down 0.1%, 0.8% and 0.5% respectively.

This article was republished with permission from TheStreet.

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