US Banks Agree Multi-billion Mortgage Settlements with Regulators

Two of the biggest civil settlements made since the onset of the financial crisis in 2008 will see major US banks, including Citi, JPMorgan Chase and many others, pay a total of nearly US$19bn to resolve federal allegations related to the mortgage crisis.

The first case saw a group of 10 mortgage lenders agree to pay a total of almost US$8.4bn to settle accusations by regulators that they were guilty of widespread abuse of the foreclosure systems that enables banks to seize homes from defaulting borrowers.

In the second case, Bank of America (BoA) agreed to pay almost US$10.4bn to the government-owned Federal National Mortgage Association, better known as Fannie Mae, which had to be rescued with taxpayers’ funds. The agreement aims to resolve a long-running dispute between BoA and Fannie Mae over the bank’s liability for mortgages sold to Fannie Mae, which subsequently incurred losses.

BoA had argued that the claims, many of which related to mortgages that originated with Countrywide, the California-based lender acquired by BoA in July 2008, were exaggerated. Prosecutors had originally instigated criminal investigations against Countrywide’s former chief executive officer (CEO), Angelo Mozilo, and others but dropped these in favour of pursuing civil fines.

BoA’s CEO, Brian Moynihan, said the agreements were “a significant step” in resolving the institution’s issues that related from its purchase of Countrywide, which was one of the biggest US mortgage lenders but with a reputation  but for approving high-risk loans. However, the settlements will cost the bank a total of US$14.1bn and are expected to reduce its pre-tax profit for Q412 by around US$2.7bn.

As part of the agreement, BoA will make a cash payment to Fannie Mae of US$3.6bn and also repurchase for US$6.75bn certain residential mortgage loans sold to Fannie Mae, which BoA has valued at less than the purchase price. These actions are expected to be covered by existing reserves and an additional US$2.5bn (pretax) in representations and warranties provision recorded in Q412.

BoA also agreed to make a cash payment to Fannie Mae to settle substantially all the lender’s outstanding and future claims for compensatory fees arising out of past foreclosure delays. This payment is expected to be covered by existing reserves and an additional provision of US$260m (pretax) recorded in Q412.

Bradley Lerman, Fannie Mae executive vice-president (EVP) and general counsel, said in a statement: “Fannie Mae has diligently pursued repurchases on loans that did not meet our standards at the time of origination, and we are pleased to have reached an appropriate agreement to collect on these repurchase requests.”


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