While the $25 billion settlement over foreclosure abuses referred to above is getting all of the media attention, even if the settlement receives court approval, the big banks’ legal problems shouldn’t be over. As I understand it, the settlement, if approved, will allow the very large banks to resolve only one aspect of their mortgage-related problems. These banks should still have tremendous civil exposure in a wide range of lawsuits related to the housing crisis. The national agreement appears to only settle a number of civil violations related to the servicing of mortgages, but it shouldn’t prevent state and federal authorities from filing criminal actions over related activities. If it does more than what I understand the settlement to do, it won’t be good for most individuals affected by the banks’ wrongdoing.

If my understanding is correct, the banks will still face a number of civil lawsuits and investor requests to buy back defective loans that had been packaged into securities and sold under highly questionable circumstances. This is an area of concern that must be addressed and not swept under the rug. Thus far, I don’t believe this facet of the overall problem has received the attention it deserves. While those persons in that area of concern may not have been involved in criminal activity, in my opinion, some came very close. In any event, there should remain massive civil exposure for lots of banks and other companies that were involved in bundling bad mortgages and selling them as securities.

The national settlement also leaves open the probability of future claims in excess of this settlement on securitization issues. There are also lots of investors who bought the bundled mortgage bonds who have claims. Hopefully, the agreement won’t impede the task force launched last month by the Obama Administration to investigate the banks’ packaging of loans into securities. As we reported last month, this was a major source of investor losses in the collapse of the nation’s housing boom. New York Attorney General Eric Schneiderman, who leads the mortgage-backed securities task force, says that banks are getting very limited immunity. The settlement won’t stop investigations or legal action against the banks over misconduct that led to the housing crisis, according to General Schneiderman.

The New York Attorney General will be able to continue a separate lawsuit against the banks for their use of the mortgage registry MERS in allegedly deceptive practices. He said that on multiple fronts, his office will continue “to investigate the mortgage crisis, and ensure that justice and accountability prevail.” The U.S. Securities and Exchange Commission is also probing residential mortgage-backed securities activities.

Banks still face billions of dollars in claims from investors to buy back soured mortgage securities issued during the housing boom. In addition, banks still face securities fraud lawsuits filed by investors who allege they were misled about the quality of the loans they were buying. The regulator that oversees Fannie Mae and Freddie Mac filed such a suit against 17 large banks last year on behalf of the government-controlled housing finance entities. In a recent report, a Citigroup analyst admitted that Bank of America alone still faces $12 billion to $32 billion in losses related to investor claims to buy back loans and related securities. So, while there was a national settlement, the banks are still under investigation on a number of fronts and in several areas of concern.

The global settlement agreement releases the banks from civil claims by the government over faulty foreclosures and mishandling of requests for loan modifications. Gary Townsend, chief executive of Hill-Townsend Capital, which invests in banks, said the settlement is a positive for the banks in that it allows the banks to put one more issue behind them. Hopefully, that’s all it does.

Source: Insurance Journal