A nationwide settlement on foreclosure practices has ended one headache for the banks involved, but there are signs that it is only the beginning of many others.
The agreement between 49 states and five large banks gives the financial giants immunity from future complaints about some aspects of their foreclosure practices. The banks had previously made changes to improve the way they foreclose on homeowners and had put aside most of the funds necessary to pay for the $25-billion settlement.
Until recently, analysts thought this might put to rest many of the largest complaints about the role the banks played in the financial crisis and its aftermath. It hasn't.
There are a growing number of signals that prosecutors and regulators are stepping up efforts to bring new lawsuits and criminal charges in connection with the crisis.
"The mortgage foreclosure settlement in many ways is just the least of their problems," said James Cox, a professor of securities law at Duke University in Durham, N.C. "The banks are not going to see the bright sunlight for some time to come."
The settlement releases the banks from claims involving foreclosures, mortgage customer servicing and loan originations. However, authorities can still investigate various fraud claims, including those involving the mortgage bonds whose meltdown triggered a global financial crisis.
What's more, there is no criminal immunity or release from private claims by individuals or class-action lawsuits.
The settlement itself is still being viewed as a positive thing within the industry, given that it erases one of the many points of uncertainty that have hung over executives and complicated planning for the future.
Wells Fargo & Co. Chief Financial Officer Timothy Sloan hailed the agreement as being good for the company and shareholders. He said in a speech Thursday that the deal "is a significant and important agreement, which we believe is good for the country, good for our customers and good for our shareholders."
Investors did not appear convinced. Shares of Wells Fargo, JPMorgan Chase & Co.,Citigroup Inc. and GMAC Mortgage parent Ally Financial Inc. dropped Thursday.Bank of America Corp. shares edged slightly higher.
The hard line against banks, laid out by President Obama during a briefing Thursday, is a marked shift from just a few months ago. Most of the government's criminal prosecutions against financial executives had fizzled out and a growing number of bank critics were complaining Wall Street was getting off too easy.
Banks also lost out on their attempts during negotiations to be given immunity from future investigations on a broad number of issues related to the mortgage meltdown. New York, California and several other states complained about the banks seeking leniency, and the immunity was narrowed considerably in the final settlement.
"It does not release the group for a host of remaining liabilities," Nomura Securities bank analyst Glenn Schorr wrote Thursday.
When New York Atty. Gen. Eric Schneiderman announced his participation in the settlement Thursday, he said it would not stop several ongoing efforts that he is leading.
"On multiple fronts, we will continue to investigate the mortgage crisis that has impacted communities in every corner of this state, and ensure that justice and accountability prevail," Schneiderman said.
Schneiderman is helping to lead a new federal task force that was announced by Obama during his State of the Union speech and is aimed at providing a full probe of the role the banks played in the crisis.
Criminal charges have already been filed against Credit Suisse bankers for their role in lying about the value of mortgage-backed bonds as the financial crisis was heating up. This is a new approach to prosecuting bankers and goes to the core of the complaints about how the financial industry inflated the housing market bubble.
Preet Bharara, the U.S. attorney in Manhattan, said the "charges demonstrate our deep commitment to bringing these kinds of cases, notwithstanding how challenging they may be."
Meanwhile, the Securities and Exchange Commission is looking into filing civil lawsuits against banks and other Wall Street executives over securities violations. The Federal Deposit Insurance Corp. has brought civil suits accusing former officers and directors at failed banks of negligence.
Banks are also facing a number of civil lawsuits filed by customers and investors who said they were wronged by banks during the financial crisis.
Thursday's list of settling companies did not include some of the biggest names of the subprime era, lenders whose mortgage operations were taken over by other financial firms when they failed.
For example, Citigroup took over loan servicing for the parent of Ameriquest Mortgage Co. of Orange, one of the largest subprime lenders as recently as 2005. And Bank of America has sustained tens of billions of dollars in losses from its 2008 acquisition ofCountrywide Financial Corp.of Calabasas.
Government officials said they are talking with nine other home lenders about signing on to the agreement. One of those companies was OneWest Bank of Pasadena, the privately held successor firm to IndyMac Bank, a Countrywide spinoff that had specialized in home loans made with little verification of borrowers' incomes.
Analysts predicted that many of the banks would adopt the new procedures for dealing with troubled borrowers and that some would pay penalties for their roles in the foreclosure fiasco.
In a note to investors, RBC Capital Markets analysts said banks including PNC Financial Services Group Inc., SunTrust Banks Inc.and US Bancorp had made fourth-quarter provisions that were widely interpreted as being reserves for the mortgage settlement with the attorneys general and the federal government.
For example, US Bancorp, the big Minneapolis bank that took over failed adjustable-mortgage lender Downey Savings of Newport Beach, said in its fourth-quarter earnings presentation that it recorded a $130-million expense for "mortgage servicing matters." Wall Street regarded that as "earmarked for the potential settlement," RBC analyst Jon Arfstrom said.
Many provisions of the settlement overlap with terms of the previous consent decree between the 14 banks and their federal regulators.
Those include designating a single person for distressed borrowers to contact so they aren't bounced around from one call center employee to another. Another included in the April 2011 settlement ends "dual tracking" by putting the foreclosure process on hold if a mortgage has been approved for a trial modification.
The settlement also requires banks to hire outside auditors approved by regulators to review foreclosures that were completed or in process during 2009 and 2010. They are being asked to identify improper foreclosures, violations of state and federal law, and other errors that caused financial harm to borrowers.
Borrowers who believe they were harmed beyond the payments they receive as part of Thursday's settlement may seek an independent foreclosure review from theU.S. Office of the Comptroller of the Currency, the chief regulator of national banks.