Banks hammered by $20bn mortgage bill

Tim Wallace
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US BANKS were hit with compensation payments and settlement costs of almost $20bn (£12.4bn) yesterday as regulators and the industry moved to end long-running rows over the toxic debt and aggressive repossessions of the credit crunch era.

Ten banks will have to pay a total of $8.5bn in compensation and mortgage assistance to customers who suffered from bad foreclosure practices, under an agreement with the Federal Reserve and the Office of the Comptroller of the Currency.

And Bank of America Merrill Lynch has agreed to pay $10.35bn to Fannie Mae to settle a long-running battle over bad mortgage books it sold to the state-backed agency between 2000 and 2008.

To cover the cost Bank of America will use existing reserves, sell the servicing rights on 2m loans and use $2.5bn in representations and warranties provision, but will still have to take a $2.5bn hit to fourth quarter earnings, due out next week.

The combined payments of close to $20bn take the industry a big step closer to cleaning up the disputes from the boom years and the financial crisis, though more banks are still in talks with the Fed and with Fannie Mae.

US stocks on the Dow Jones fell 0.52 per cent, with the share price of most of the affected banks slipping.

SunTrust led the fall with its stock down 1.9 per cent, followed by Wells Fargo which dipped 1.12 per cent.

Bank of America’s stock initially edged up suggesting markets had priced in the charge, but it ended the day down 0.66 per cent.

The compensation payments will see 10 banks give $3.3bn in cash to customers, followed by $5.2bn in other aid such as eased terms on loans.

Individual borrowers will receive compensation of between several hundred dollars and $125,000.

The banks involved are: Aurora; Bank of America; Citibank; JP Morgan Chase; MetLife Bank; PNC; Sovereign; SunTrust; US Bank; and Wells Fargo.

The settlement ends the time consuming process customers have had to go through until now to claim money back, bringing in a quicker process.

Bank of America’s settlement with Fannie Mae sees the bank pay $3.6bn in cash and repurchase certain residential mortgage loans for $6.75bn, as it had previously valued them at less than the purchase price.

“Fannie Mae has diligently pursued repurchases on loans that did not meet our standards at the time of origination,” said the agency’s Bradley Lerman, arguing the settlement “is in the best interest of taxpayers.”

Analysts at ratings agency Fitch praised Bank of America’s settlement.

“The settlement amount is below expectations under various stress scenarios,” the agency said.

“This settlement substantially addresses much of the uncertainty related to this exposure.”

The deal follows another last February, when Bank of America, Citigroup, Wells Fargo, JP Morgan Chase and Ally Financial agreed to give homeowners $25bn to settle claims over improper foreclosure practices.