DS News

60 Critics say the expensive deals will help a few with direct relief but only at the cost to many in the sense that it will discourage risk taking on the parts of these institutions. Further, these penalties will eventually be passed along to consumers in the years to come in the form of higher interest rates and increased fees. e entire industry is paying for the sins of a few. "On the one hand, we want banks to be healthy," says Brian Mahany, a self-described whistleblower attorney whose own estimates bring settlement totals from the financial crisis onward to $161 billion. "e fines are taking their tolls." CRUNCHING $65 BILLION Each successive mortgage settlement seems to set a new precedent. Now, adding in 2012's $25 billion from four of those banks plus Ally, the total settlement payout for the nation's six largest servicers—just from the past few years—approaches a neck-cramping $65 billion. All those zeroes make for some headline- grabbing press releases, with U.S. Attorney General Eric Holder praising Bank of America's $16-billion settlement in August for offering "$7-billion in relief to struggling homeowners, borrowers and communities." He went on to call the commitment "appropriate given the size and scope of the wrongdoing at issue" in a statement. But that's just a little more than half of what the mortgage giant agreed to pay in August to settle Countrywide's misdeeds. Much of the rest is headed straight back to the federal government, which will use it to repay executive agencies that lost big on the acquired unit's securities. Other amounts will exchange hands just to satisfy investors in Treasury debt and government-backed enterprises like Fannie Mae, Freddie Mac, and Ginnie Mae. Under the Financial Institutions Reform, Recovery, and Enforcement Act—a centerpiece of the government response to the savings and loans crisis, the last "big one"—the Treasury Department plans to help itself to about $5 billion from that settlement in the form of civil penalties. Two other agencies, the FDIC and Federal Housing Administration, will shore up their capital reserves with infusions of more than $1 billion and $800 million, respectively. Another billion dollars will flow through the offices of state attorneys general for California, Delaware, Illinois, Kentucky, Maryland, and New York. And that's just the recent landmark settlement with Bank of America. Paying for the sins of Bear Stearns and Washington Mutual, its own acquisitions, JPMorgan Chase agreed to fork over a then- unprecedented $13 billion, with just less than a third of it earmarked for homeowner relief, a sixth or so for Treasury, and an eighth for compensation to national associations and executive agencies. Treasury also sopped up more than half of Citi's $7 billion in July, leaving just $2.5 billion for direct consumer relief. For its part, Goldman Sachs will pay $3.15 billion to buy back mortgage-backed securities the Federal Housing Finance Agency said helped tank Fannie and Freddie during the crisis. ose multimillion dollar increments can go a long way toward helping quasi-executive agencies like the FDIC and FHA replenish their emergency funds, handy in a crisis like the Great Recession and sorely depleted in the fallout. It's worth noting these agencies maintain their funds not with federal income tax dollars, but fees collected from litigation activities, including actions against criminally negligent bank owners and mortgages insured for low-income homeowners. Experts say the agencies played critical roles in stabilizing the housing market—and paid the price. e FHA reportedly received its first $1.7-billlion taxpayer-funded infusion from the federal government last year after stepping up to back more than a third of all mortgages during the financial crisis. e FDIC itself hovered near first-time bailout territory for a few years as it oversaw liquidations for nearly 400 failed banks between 2009 and 2011. 'NOT INSURMOUNTABLE' Despite the amounts that have been earmarked in each settlement, critics have it correct when they say it's difficult to judge when crimped homeowners will see government payouts from mortgage settlements. Federal housing aid programs have been less than reliable. Of the hardest hit states slated for relief, California homeowners counted only 20 percent of their $2 billion due in aid disbursements from the Troubled Asset Relief Program (TARP) last year. In July, Peter Wallison, the former Reagan White House lawyer, now senior fellow for financial policy studies with the conservative American Enterprise Institute, opined in e Wall Street Journal that "uncertainties, costs and restrictions . . . have sapped the willingness or ability of the financial industry to take the prudent risks" needed for a faster recovery. He is correct about uncertainty. Citigroup reported just $181 million in second quarter net income earlier this year, quite a notch down from $4.2 billion. Citi CEO Michael Corbat attributed their lower earnings to the "significant impact" of the $7 billion settlement it negotiated with officials. Critics say liability fears can scare up a contagion. Fearing litigation and costs needed to meet new regulatory thresholds, many banks have chosen to sell off or close down their divisions rather than continue to buy home loans in the correspondent channel. e past two years alone saw staples like Ally, MetLife, and Citi draw down their home loan programs, with each one more or less echoing Wallison's claims about market uncertainty. But others disregard any negative impact from the settlements for the industry's long– term economic outlook. Paul Ashworth, chief U.S. economist with Capital Economics, a firm specializing in economic risk analysis, dismisses notions that any of the recent deals will "reduce risk taking" by large lenders and servicers. "I can't see any evidence of it," he says. "e fines are large, but they're not insurmountable." If nothing else, recent profits show servicers are staying afloat. Without accounting for its standout settlement, in July Bank of America reported $2.3 billion in second quarter net income on revenue of $22 billion. Wells Fargo's was $5.7 billion, up from last quarter, on $21.1

• Cover