Foreclosure Mess Finally Resolved

Homeowners whose properties were wrongly foreclosed as well as the entire housing sector can now breathe a sigh of relief. The Office of the Comptroller of the Currency (OCC) and other banking regulators have announced a foreclosure settlement deal with 10 banks.

The banks – Citigroup, Inc. ( C - Analyst Report ) , MetLife Bank, a unit of MetLife, Inc. ( MET - Analyst Report ) , Bank of America Corporation ( BAC - Analyst Report ) , JPMorgan Chase & Co. ( JPM - Analyst Report ) , Wells Fargo & Company ( WFC - Analyst Report ) , PNC Financial Services Group Inc. ( PNC - Analyst Report ) , SunTrust Banks, Inc. ( STI - Analyst Report ) , U.S. Bancorp ( USB - Analyst Report ) , Aurora Loan Services and Sovereign Bank, unit of Banco Santander, S.A. ( SAN - Snapshot Report ) – have agreed to pay in aggregate $8.5 billion in settlement. Yet, four banks – HSBC Holdings plc ( HBC - Analyst Report ) , Ally Financial, EverBank Financial Corp. ( EVER - Snapshot Report ) and OneWest Bank – are still in discussions with the regulators.

Out of the total, $3.3 billion will be utilized for direct payments to eligible borrowers, while $5.2 billion will be used for providing relief to troubled homeowners through principal reductions and loan modifications. The deal will enable more than 3.8 billion homeowners, whose property was wrongly foreclosed in 2009–2010 by the abovementioned mortgage servicers to get cash compensation, ranging from a few hundred dollars to maximum of $125,000.

As a part of the deal, borrowers are expected to be contacted by the end of March with details related to their payments. Further, the regulators will form 11 categories of aggrieved borrowers and the banks will categorize borrowers for payments.

Additionally, under the terms of the deal, the process initiated by the OCC in 2011 – to review all the borrowers’ files that were wrongly foreclosed in 2009-2010 – would end. Under that proposal, the banks were required to hire independent consultants to go through the loan files and look for any faulty foreclosure practice.

However, this was turning out to be costly and time-consuming affair for the banks – having already spent nearly $1.5 billion on the consultants hired. Therefore, they opted for a one-time settlement deal.

Yet, banks would have to take one-time charges related to the settlement. Wells Fargo anticipates a pre-tax charge of about $644 million in the fourth quarter of 2012 related to the deal, whereas Citigroup expects to record a pre-tax charge of $305 million.

Further, BofA anticipates its fourth-quarter results to be adversely impacted by about $2.5 billion of pre-tax charge for the settlement deal, litigation (primarily mortgage-related) and other mortgage-related matters. For USB, the deal is anticipated to lower its fourth-quarter earnings per share by 3 cents for the cash part of the deal.

Though the settlement is expected to marginally dent the companies’ fourth-quarter results, in the long run it will be a relief for the banks. Further, the distressed homeowners would also be benefited. We are hopeful that like the earlier foreclosure settlement deal, this one would also be a decisive step in restoring confidence in businesses and rejuvenating the sagging housing market.