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The Zacks Analyst Blog Highlights: Bank of America, Fannie Mae, JPMorgan, Citigroup and Wells Fargo

Zacks Equity Research

For Immediate Release

Chicago, IL – November 5, 2019 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Bank of America BAC, Fannie Mae FNMA, JPMorgan JPM, Citigroup C and Wells Fargo WFC.

Here are highlights from Monday’s Analyst Blog:

Banks to Benefit from Easing of False Claims Act by HUD

Banks are expected to benefit from the initiative taken by the Housing and Urban Development (“HUD”) to ease worries related to mortgage sanctions.

Ben Carson, secretary of the HUD, recently announced that it has reached an agreement with the Department of Justice ("DOJ") to ensure the proper and appropriate use of the False Claims Act (“FCA”) against violations by lenders who provide mortgage loans insured by the Federal Housing Administration (“FHA”).

The FHA provides insurance on mortgages that are originated by lenders for low-income borrowers, who otherwise would not be eligible for home loans because of their low credit scores.

In 2010, banks represented almost 45% of the lenders, who originated FHA-insured mortgages. However, now, banks represent only 15% of the lenders, who originate or provide mortgage loans to low-income borrowers.

This is because, after the 2008 financial crisis, the Obama government used the FCA to build cases against banks providing such loans and imposed huge penalties. Banks were made to pay billions of dollars for wrongly underwriting mortgage loans to borrowers and certifying them as eligible for insurance by the FHA, thus leading the government to pay out insurance, when the borrowers defaulted.

In 2014, Bank of America was made to pay $1 billion to settle an FCA case, which alleged that the bank fraudulently sold defective mortgages to Fannie Mae and Freddie Mac . In the same year, JPMorgan coughed up $614 million for wrongly underwriting mortgage loans and submitting the same for insurance coverage when those were not eligible. Further, Citigroup’s mortgage accord of $7 billion was reached in July the same year.

In 2016, Wells Fargo agreed to end a three-year-old mortgage litigation filed by the U.S. government regarding the bank’s FHA lending program. The settlement amounted to around $1.2 billion.

Thus, the Memorandum of Understanding (“MOU”), which has been issued by the DOJ and the HUD, aims not to file cases against banks on similar grounds and encourages banks to originate more mortgages insured by the FHA. The MOU is issued to provide transparency and clarity on what steps banks should take to avoid paying fines.

Per the agreement, going forward, the HUD and not the DOJ will enforce cases, involving underwriting mistakes. The memorandum also makes it clear which level of underwriting violation will prompt possible sanctions.

Our Take

As the reliance on the FCA will reduce, banks will not have to worry about billions of dollars in provisions that they made earlier. Also, as legal provision costs will likely decline, it would ease the pressure on banks’ bottom line.

Amid an improving economy, with relatively lower interest rates, if banks extend more loans to home buyers, it would support their mortgage-related income. Moreover, as demand for mortgage loans is already on the rise due to a decline in rates, if banks originate more FHA- insured mortgage loans, it would help in relieving pressure on margins to some extent.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.


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