Did you notice? The slight rally in financials caused by today’s mortgage settlement faded by 3:00 p.m. That means, investors and Wall Street don’t feel safe yet, and they shouldn’t.
If you missed the details of the deal, major banks will pay out about $25 billion — Wells Fargo will pay $5.4 billion, JP Morgan Chase $5.3 billion, Ally financial $310 million, Citigroup $2.2 billion, and Bank of America $11.8 billion. Around $5 billion of that will be paid in cash.
It’s a substantial sum, sure, but it’s nowhere near the end. The suit specifically addresses robo-signing and other misconduct by banks after homeowners had their mortgages. And according to Manal Mehta of Branch Capital management, “the real issue is the origination and securitization of these mortgages… I’m not sure what today’s settlement does for banks.”
He’s talking about the government going after the roots of the financial crisis, and there are a few examples to show that officials are mobilizing to start doing that in earnest. For one, there’s the Department of Justice task force set up to investigate just that. The co-head of that group, Attorney General Eric Schneiderman, sent around a list of all the claims banks are exposed to despite this settlement:
- All criminal claims.
- All claims based on mortgage securitization misconduct, under securities fraud statutes, including New York’s Martin Act, and other sources of law. This includes securitization claims based on servicing, foreclosure or origination-related facts.
- All claims directly against the private national mortgage electronic registry system known as MERS, as well as claims against financial institutions for the use of MERS in the Attorney General’s recently filed lawsuit over a wide range of deceptive and fraudulent practices in New York.
- All claims for violations of fair lending laws that relate to discriminatory practices in loan origination.All tax claims, including any claim that the failure to transfer mortgage loans to the securitization trusts or other conduct violated tax rules.
- All claims by counties for lost mortgage recording fees; and
- All claims and defenses held by private and third parties, including those held by individual mortgage loan borrowers.
If that isn’t enough to freak you out, there are the lawsuits the government has already started filing regarding the roots of the mortgage crisis. For example, according to the FT, the SEC is probing Royal Bank of Scotland, Credit Suisse and others for misleading investors about the quality of mortgage loans. In the investigation, the SEC subpoenaed Credit Suisse regarding MBIA’s claims that the bank sold securities that were backed by loans that didn’t meet underwriting standards.
Banks across the industry took part in selling toxic securities and it’s one of the major reasons these bad loans spread to the wider economy. Once the probes start, there’s really no telling how far they could take investigators or what they will uncover.
At least banks are warned to some extent. “The level of disclosure (on the government’s part) has increased and it’s forced banks to capitalise,” said Mehta. “But they’re still under capitalised.”
Bottom line: the problems in the housing market haven’t been solved, giving the government more impetus to continue pressing banks for cash. Today’s settlement pays homeowners about 10% of the principle on their mortgages, but most are down around 30-40% says Gus Altuzarra of Vertical Capital Markets, an asset management firm that specialises in mortgages.
“I look at this as another band aid,” he said. “The SEC is going to keep suing banks for more money, and the government will keep doing whatever it can too. It has to be a collective effort because large banks just don’t have the money to fix it themselves.”
The question is then, how much money will the banks have to shell out and how long will all of this take? Altuzarra said that at the beginning of the crisis he and his team thought it would last 18 months, now it’s been three years of sluggishness in the housing market, and we could see another three more.
And there’s another problem — a vicious cycle kind of problem. We won’t know if the housing market has recovered until credit is available to Americans so they can take advantage of low interest rates and buy houses. Banks, however, won’t start providing that credit until they feel secure. They won’t feel secure until these legal issues have cleared up.
The government won’t stop their investigations until the housing market starts moving. But the housing market won’t start moving until Americans have credit…
And so it goes.