Add yet another major settlement to the still-growing list of huge payouts by the nation’s largest banks to settle claims over toxic mortgage-backed securities. Bank of America has now agreed to pay $404 million to Freddie Mac to resolve all repurchase liabilities on home loans that it sold to the government-controlled mortgage company from 2000 to 2009. The settlement covers approximately 716,000 loans.
The List of Large Settlements Continues to Grow
Since 2010, Bank of America has agreed to pay more than $45 billion to settle various claims stemming from the U.S. housing and financial crisis, including a prior settlement to pay Freddie Mac $1.35 billion primarily to address loans sold by Countrywide Financial, which was acquired by Bank of America in 2008. Meanwhile, since September of this year, Freddie Mac has agreed to four other similar settlements stemming from repurchase liabilities, including deals worth $480 million with J.P. Morgan Chase, $65 million with SunTrust, $869 million with Wells Fargo, and $395 million with Citigroup.
On Tuesday, the United States Justice Department announced that it finalized a settlement agreement with JPMorgan Chase for $13 billion. This settlement will resolve a multitude of state and federal investigations into JPMorgan Chase’s sale of residential mortgage-backed securities to investors between 2005 and 2008. In addition to paying fines for securities violations, the proceeds from the settlement will be further distributed to compensate investors who relied upon representations made by JPMorgan Chase as to the value of the securities it sold on the secondary market. $4 billion of settlement funds is earmarked for consumer-related relief such as mortgage write-downs and payment reductions. In total, this settlement is the largest ever reached between any company and the government in U.S. history.
Bank of America and Freddie Mac are currently attempting to resolve a mortgage repurchase dispute in which Freddie Mac claims that Bank of America should have to buy back more than $1.4 billion in mortgage loans it claims were defective. The Wall Street Journal has reported that Bank of America, which is still recovering from its 2008 acquisition of Countrywide Financial, would like to reach an agreement by the end of the year. If that occurs, it will be the second such settlement between Bank of America and Freddie since 2011.
In January of that year, the two giants reached a $1.35 billion settlement in a dispute over loans sold by Countrywide. The initial settlement covered all loans sold to Freddie from 2005 through 2007. As we previously noted, within months of announcing the settlement, its terms were highly criticized by the FHFA Office of Inspector General as being based on a gross understatement of the exposure Freddie Mac faced in respect of those loans.
As of September 30, 2013 federal filings indicate that Freddie Mac has outstanding repurchase demands of $1.4 billion against Bank of America (which amounts to about 42% of all of Freddie’s currently outstanding repurchase demands). While we have not yet seen anything definitive, it has been reported that the $1.4 billion in outstanding demands, and the possible settlement thereof, relate to loans sold by Bank of America/Countrywide to Freddie during the period of 2000-2005. Continue Reading
Late last month, we commented on JP Morgan Chase’s $5.1 billion settlement with the Fair Housing Financing Agency (FHFA), as conservator of Fannie Mae and Freddie Mac. The Wall Street Journal has since reported that JP Morgan will be able to deduct that entire amount on its 2013 tax returns, allowing the company to reap a $1.5 billion tax windfall. Experts estimate that a large portion of the remaining final settlement, estimated at a total of $13 billion, may also be deductible. While JP Morgan has refused to comment about whether it will actually invoke the deductions, the revelation has greatly distressed observers, including Congress.
Newly Proposed Legislation Seeks to Close Tax Loophole
Outrage over the deductibility of the JP Morgan settlement has fueled the introduction of two bills in the U.S. House of Representatives: the Government Settlement Transparency and Reform Act, introduced by representatives Jack Reed (D., R.I.) and Charles E. Grassley (R., IA), and the Stop Deducting Damages Act, introduced by representatives Peter Welch (D., VT), a J.P. Morgan stockholder himself, and Luis Gutierrez (D., IL.).
Generally speaking, fines and penalties intended to punish and deter illegal conduct are not deductible, but compensatory payments are, as ‘ordinary and necessary’ costs of doing business. Settlements like those reached between the FHFA and JP Morgan last month, and between the FHFA and Wells Fargo this month, often fail to specify which portions of the total settlement amount are punitive in nature, creating a tax loophole for the defendants. The newly proposed legislation seeks to close that loophole. Continue Reading
I will be a panelist at the Mortgage Bankers Association’s (MBA) upcoming Accounting and Financial Management Conference 2013 in Boca Raton, Florida. I will participate in a session on November 20 at 4:15pm entitled “Managing and Accounting for Risk of Repurchases, Indemnifications and Compensatory Fees.”
Brandon Coleman, CPA, a partner in Deloitte’s Accounting National Office, will join me as a panelist. The session will address:
• The problems now versus one year ago
• Triggers that investors cite today for repurchases and compensatory fees
• Options for reducing risk of financial harm: representations and warranties and other repurchase defenses, insurance, pursuing recoveries, etc.
• Accounting guidance and reserve issues impacting capital requirements and valuation
The conference will be held November 19-21 at Boca Raton Hotel. Please click here to register for the event.
We recently commented on JPMorgan Chase’s blockbuster agreement to resolve a class-action lawsuit for $300 million brought by more than a million homeowners nationwide. The dispute centered on allegations that Chase profited by collecting kickbacks from insurance companies for imposing force-placed insurance policies at excessive rates on properties that secured its loans where coverage had lapsed or where properties were underinsured. The settlement is anticipated to spark new litigation and encourage similar resolutions in several other related cases pending in the U.S. District Court for the Southern District of Florida.
In a new development announced yesterday, the Federal Housing Finance Agency (“FHFA”) is directing Fannie Mae and Freddie Mac to prohibit servicers from being reimbursed altogether for expenses associated with lender-placed insurance practices. The responsibility of the FHFA as the nation’s housing finance regulator, evidenced by its mission statement, is to “[e]nsure that the housing GSEs operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment.”
While framed as a response to consumer complaints, the FHFA’s newly imposed restrictions on GSEs regarding forced-placed insurance appear to be motivated by mounting concern that the questionable practices expose Fannie Mae and Freddie Mac to potential litigation and a further decline in reputation. Continue Reading
Forced-Place Insurance Business Surged Following the Housing Collapse
JPMorgan Chase and Assurant Inc. recently agreed to settle a class-action lawsuit initiated in June 2012 for $300 million brought by a class of 1.3 million homeowners nationwide who claimed that they were overcharged for forced-placed insurance. The plaintiffs have also entered into a separate settlement for $4.75 million with Chase relating to forced-placed insurance for policies covering wind damage. The $300 million settlement relates to polices that cover fire and other risk.
The class-action lawsuit against JPMorgan Chase (as well as other similar actions against Wells Fargo Bank N.A., Bank of America N.A., Citibank N.A., and HSBC Bank Inc.) is pending in Miami before Chief Judge Federico A. Moreno of the United States District Court for the Southern District of Florida. Although Chase entered into the settlement agreement in September 2013, the final approval hearing before Judge Moreno is scheduled for February 14, 2014.
Add another mega-settlement to the rapidly growing list of huge payouts by the nation’s largest banks to federal agencies. Wells Fargo reportedly has now agreed to pay the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, close to $1 billion. The settlement payment will resolve claims that Wells Fargo sold toxic mortgage-backed securities to Fannie and Freddie prior to the financial crisis. The specific terms of the deal are said to be subject to a confidentiality agreement.
The FHFA has served as Fannie Mae and Freddie Mac’s conservator since their $187 billion taxpayer bailout in 2008. It filed suits against 18 banks over losses suffered by Fannie Mae and Freddie Mac on more than $130 billion worth of mortgage-backed securities. The certificates were underwritten between 2005 and 2007. The FHFA has alleged that offering documents filed with the Securities and Exchange Commission for every one of the more than 400 certificates at issue failed to disclose major underwriting problems and misstated the loan-to-value ratios of the underlying loans.
Wells Fargo was the only major U.S. bank not named as a defendant in the FHFA’s 2011 lawsuit over alleged misrepresentations and omissions in the sale of residential mortgage-backed securities. It is now believed that Wells was not sued in that instance only because its attorneys had already begun discussions with the FHFA about settling the case. Continue Reading
On October 25, 2013, the Federal Housing Finance Agency (“FHFA”), as conservator of Fannie Mae and Freddie Mac, announced that it will receive settlement payments of $5.1 billion with J.P. Morgan Chase & Co. in connection with claims of alleged violations of federal and state securities laws related to private-label, residential mortgage-backed securities purchased by Fannie Mae and Freddie Mac.
The larger settlement involved claims related to securities sold to the companies between 2005 and 2007 by J.P. Morgan Chase & Co., Bear Stearns & Co., Inc. and Washington Mutual. To resolve these claims, J.P. Morgan Chase & Co. agreed to pay approximately $2.74 billion to Freddie Mac and $1.26 billion to Fannie Mae.
In separate settlements, J.P. Morgan Chase & Co. agreed to pay $670 million to Fannie Mae and $480 million to Freddie Mac to resolve representation and warranty claims with Fannie Mae and Freddie Mac related to their purchases of single-family mortgages. Continue Reading
A federal jury ruled yesterday that Countrywide, now owned by Bank of America, defrauded Fannie Mae and Freddie Mac by selling them defective mortgages in advance of the great financial crisis of 2008. A former Countrywide executive, Rebecca Mairone, was also found liable in the case.
Whistleblower Exposed Countrywide’s “Hustle” Program
The Justice Department lawsuit concerned a Countrywide program established in 2007 called the High-Speed Swim Lane — nicknamed “the Hustle.” The complaint arose from disclosures made by a former Countrywide employee who became a “whistleblower,” exposing evidence of substantial misconduct by Countrywide. The government took on the lawsuit in the name of that former employee, and asserted that Countrywide’s “Hustle” program was “intentionally designed to process loans at high speed and without quality checkpoints, and generated thousands of fraudulent and otherwise defective residential mortgage loans.” Speed in generating loans, not meaningful assessments of whether the borrowers even qualified for those loans, was what was most important to Countrywide, according to the former employee who blew the whistle on Countrywide’s practices.
These loans were then misrepresented by Countrywide to Fannie and Freddie as being of very high-quality. Fannie and Freddie were told Countrywide had “strengthened its underwriting guidelines and scaled back on riskier loan products,” the complaint says. The jury’s verdict essentially validates in full the allegations made in the complaint. News reports indicate that the federal government will seek penalties exceeding $800 million and the whistleblower will collect a portion of the amount that is awarded.