It has been more than two weeks since the robo-signing settlement was reached and there still is no detailed document of the agreement available for review or any paperwork filed with a court. That has not stopped us from pointing out the political nature of the document or the fact that it is highly unjust. But we don’t need the detailed document to be able to analyze the response from banks.
One of the reasons we argued the mortgage settlement is unjust is because it is forcing mortgage investors who had NOTHING to do with the robo-foreclosing scandal to take tens of billions in losses. The biggest political win in the settlement was the $12 billion in mortgage modifications, $5 billion in short-sale and similar sales, and $3 billion in refinances that the banks committed to doing. But most of those costs are not going to hit the banks, but rather the investors in the mortgages being modified. A majority of losses at the banks are for the settlement’s other provisions—cash for foreclosed borrowers and the AGs slush fund.
Just look at the bank’s responses to the settlement. From American Banker:
Overall, the settlement agreement will have no material impact on the top five banks' profitability or on their financial results in the future, each of the banks says, and their stock prices were little changed in afternoon trading.
A $26 billion bottom line is not that much relative to the trillions on these banks balance sheets. At the end of 2011, the five banks had a combined $7.8 trillion in assets. So we are talking about 0.003 percent of their assets. But still, if $26 billion were hitting the banks in a single quarter that would have at least some material impact on the banks. The reason that it won't have much of an effect is three fold: (1) they were prepared for this and already set aside the money or wrote off the losses, (2) the relief to homeowners is spread out over a number of years, and (3) most of the relief will not come from the banks themselves. Consider the following:
Bank of America, which is taking the biggest hit on this settlement, owes cash payments of up to $3.24 billion to state and federal sources under the agreement, and has committed to $8.58 billion in relief payments (including an up to $1 billion settlement with FHA attached to this deal.) But their press release about the agreement says:
The financial impact of the settlements is not expected to cause any additional reserves to be taken over those made during 2011, based on the company’s understanding of the terms of the agreements in principle. The refinancing assistance is expected to be recognized as lower interest income in future periods as qualified borrowers pay reduced interest rates on loans refinanced. Although the company may incur additional operating costs (e.g., servicing costs) to implement parts of the global settlement in future periods, it is expected that those costs will not be material.
Having to take a loss of over $8 billion in a quarter would be significant relative to their recent earnings statements. But if MBS investors are taking those refi and mod hits, then there are no worries.
How do the other banks in the deal stack up?
JPMorgan Chase owes $1.08 billion in cash payments and has committed to $4.21 billion in relief for borrowers. However, the bank has already put money aside over the past five quarters of negotiation to cover the cash payments. And American Banker reports:
The bank also will incur some additional operating costs to implement the new servicing standards required by the deal, but the financial impact "will not be material," says Kristin Lemkau, a JPMorgan Chase spokeswoman.
Wells Fargo has $1.01 billion in cash payments required by the agreement and $4.34 billion in relief payments. But they issued a press release stating:
As of December 31, 2011, the company had fully accrued for the Foreclosure Assistance Payment [the cash payment]. Similarly, as of December 31, 2011, the expected impact of the Consumer Relief Program was covered in our allowance for credit losses and in the non-accretable difference relating to our purchased credit-impaired residential mortgage portfolio. The Refinance Program will not result in any current-period charge as the impact of this program will be recognized over a period of years in the form of lower interest income as qualified borrowers benefit from reduced interest rates on loans refinanced under the program.
Citigroup only has to make $415 million in cash payments and $1.79 billion in relief commitments. They will wind up adjusting their 2011 financial results to reflect $84 million in additional losses since they had not saved up completely for the cash payment, plus $125 million in losses for the same statement on litigation related payments. But similar to other press releases they said:
Citi expects that existing reserves will be sufficient to cover customer relief payments... The impact of the refinancing concessions will be recognized over a period of years in the form of lower interest income.
Ally Financial Inc., the smallest of the banks involved but the one first revealed to be robo-foreclosing, has $110 million in cash payments required and $200 million in relief payments committed under the deal. But as American Banker writes, they already have this money set aside:
Ally Financial Inc. says it has set aside reserves to cover its $110 million cash payment and $200 million in borrower relief. The company says in a press release that "the financial impact of the agreement will not be material on financial results for the first quarter of 2012 and future periods."
So I count cash payments of $5.855 billion. It is yet unclear how much of the refi, principal mod, and other mortgage relief commitments will hit balance sheets, but since the banks do not really appear worried it is safe to say that investors should prepare for the blow.