Seven years after home prices began falling from record highs and more than three years since the start of the financial crisis, the nation's five biggest mortgage lenders have agreed to a sweeping $26 billion settlement with state and federal authorities over questionable foreclosure practices. While the dollar amount could grow as large as $40 billion if more banks sign on to, as it stands now, the deal is the largest such settlement since 1998, when states agreed to a $206 billion dollar package with cigarette manufacturers.
The hard-fought agreement between 49 states, the federal government, and the 5 banks --Bank of America (BAC), Citigroup (C), JP Morgan (JPM), Wells Fargo (WFC) and Ally Financial-- will bring to a close probes of foreclosure abuses that include sloppy record-keeping, poor oversight, and automated or "robo" document signing. However, the SEC will reportedly move forward with charges against banks for wrongfully bundling and selling weak loans or bond packages to investors.
As Macke and I discuss in the attached video, lenders have been setting aside money for this and other litigation for years and the process has caused unprecedented delays and legal back-ups in foreclosures nationwide; a problem that many have suggested is holding back a recovery in the broader real estate market.
Of course, how that money finds its way into the housing sector and which loans will qualify for reduction, refund or relief remains to be seen. Noted banking analyst Dick Bove of Rochdale Securities already labeled the settlement "the deal from hell" and outlined numerous conflicts and inequalities rewarding homeowners who broke the rules while punishing those who did everything right.
What is known for sure is that the bank stocks involved in the settlement are not only holding their ground today after the news, but are also enjoying 10% to 50% year-to-date gains.
Macke says today's deal, while touted as a win for consumers, is as actually a bigger win for the banks.
"It puts aside some of the old baggage that they have. Every time they make a step in this direction, it's more bullish for the banks," Macke points out.
Perhaps the settlement could end up actually doing more harm than good? The entire lending and mortgage process has already undergone a post-crisis makeover, but home prices have still not convincingly hit bottom.
What do you think of the settlement? How will it affect you? The housing market?
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