As US earnings season gets underway, US Banks get straight down to business. Major banks are finally being forced to compensate US foreclosure victims for thousands of mis-handled settlements which may ultimately benefit the share price. The banks at the heart of the settlement are Citibank, JP Morgan, Bank of America and Wells Fargo. Between them, the expected payout from the settlement is expected to be in excess of $8.5 billion.
The settlement comes as a federal ruling concludes that the banks wrongfully (by mishandling paperwork and skipping several steps within the client foreclosure process) foreclosed on home owners, requiring them to sell their homes – a situation which could have possibly been avoided. Had this been avoided, in many cases it would have allowed homeowners to reconfigure their debt positions and possibly continue to own their own homes. This decision comes at the end of almost two years of hard work leading up to the ruling.
While $8.5 billion sounds like a large sum of money to the bottom line of major banks, the payout covers some 3.8 million people and is an average of just $2,237 per homeowner. Not an excessive amount for a wrongful foreclosure! As each varies in seriousness, some homeowners will actually be receiving as much as $125,000 where the home was wrongfully seized.
To shareholders, this will likely be seen as a positive move for banks: As banks attempt to put the housing crisis behind them, they will be looking to settle claims and reassure investors that their books are in a better position than in previous years. As they further cement their positions, in the eyes of shareholders, it’s likely to lessen their future liability as well as provide a boost to future confidence. And it couldn't come at a better time given recent earnings and lending stats. Many critics, me included, simply view the most current settlement as a win-win for the banks as they continue to distance themselves from their actions throughout the housing crisis as they put forward to regulators a value far below the actual cost of their actions and wrongdoing in the eyes of mortgage holders.
In a separate deal, Bank of America agreed to pay Fannie Mae as much as $10.3 billion relating to claims over loans which soured throughout the GFC.
So were the banks acting in a knowingly negligent capacity? Or is it rather a case of miscommunication and a lack of regulation? Well, maximising profits is the name of the game and it’s fairly clear that this was a major factor in the mis-handled foreclosures. Such a large number of foreclosures were being processed between 2009 and 2010 that in many cases, the banks weren't taking the required steps, nor exploring options in the best interests of homeowners. Today much of the action actually appears to be in the best interests of shareholders.
Diane Thompson, a lawyer with the National Consumer Law Centre in America says that this is really a 'get out of jail free card' for the banks - a valid point considering that earnings from mortgages issued by major banks for the period far outstrip the sums being paid out to foreclosure victims.
This latest settlement is pocket change compared with the earnings of America's major banks. It is likely 2013 will see an increased number of accusations toward major banks and the often negligent foreclosure process millions of Americans have fallen victim to over previous years. Maybe they could take a leaf out of Australia's slightly more prudent and conservative lending book...
Aussie banks remain strong, without the potential liability faced by our American counterparts...
Stay Ahead of the Game,