The “robo-signing” debacle in the mortgage industry is finally coming to a close. The banks that were involved sent out foreclosure settlements that totaled $9.3 billion. The checks are finally on their way out to consumers after the settlement was reached earlier this year. Does this mean anything to investors?
Major banks may have wrongfully performed foreclosures on many homeowners due to automatically signing documents without conducting proper research. Nearly 90% of all borrowers who experienced foreclosures and whose mortgages were serviced by the 11 major banks will receive some sort of payment.
In this settlement that involves roughly 4.2 million homeowners, 80% will receive less than $1,000. The range of payments is $300 to $125,000. Homeowners who were denied mortgage servicing will receive small payments, whereas homeowners who had their homes wrongfully seized are set to receive the largest payments.
Some 1,082 military personnel will receive $125,000 each for the wrongful seizure of their homes while they were away on active duty. There is a law in place that prohibits banks from seizing the homes of active-duty military personnel.
Bank of America Corp (NYSE:BAC)
Bank of America Corp (NYSE:BAC) has been under a lot of scrutiny for the past few years. In its most recent quarterly earnings report for the first quarter of this fiscal year, it missed earnings expectations even though total deposits were up 57% from last year. Analysts expected the firm to earn $0.22 per share, but the bank only delivered $0.20. The bank announced its plan to cut expenses by $2 billion per quarter by 2015. It’s on track, having reduced $1 billion in operating expenses from this time last year.
Bank of America Corp (NYSE:BAC) has the highest foreclosure settlement payout of any of the major banks. It will be sending out $1.1 billion in cash plus an additional $1.8 billion in mortgage-balance reductions. The average loan reduction will be around $100,000.
For investors, this means a drop in cash assets and a reduction in loan-portfolio size. With more than $110 billion in cash and cash due from banks, the large payout doesn’t seem so big.
Another lawsuit has been filed for $500 million, which will put a bump in the road on Bank of America Corp (NYSE:BAC)’s way to cutting costs. This lawsuit is from the Main State Retirement System over the quality of loan bundles that Countrywide Financial had invested in. Bank of America Corp (NYSE:BAC) has already settled a similar lawsuit with the National Credit Union Association over misleading the credit unions as to the quality of mortgage-backed securities it invested in. Investors responded by driving the stock price down 3.2% in recent sessions.
The bank delivered the highest net income per share it has had in the last five quarters. Revenue rose by 5.5% for the quarter and the firm is on track to hit its savings goals. The actual payouts won’t be too hard on the bank and its investors.
Wells Fargo & Co (NYSE:WFC)
Wells Fargo & Co (NYSE:WFC) has the second highest cash payout at $766 million. It will also offer $1.2 billion in mortgage balance reductions.
Wells Fargo & Co (NYSE:WFC) has had 12 quarters of consistent earnings per share growth, rising from $0.55 per share to $0.92 per share in the period. Its balance sheet has been improving and is combined with an increase in equity due to an influx of assets.
The company has also been dedicated to returning profits to shareholders. Its current annual dividend is $1.00 per share, representing a 2.7% yield. It recently raised the quarterly dividend by $0.03. Since 2009, the total dividend payment has increased from $0.20 per year to $1.00.
The company also has a projected growth rate of 8% annually for the next five years. Wells Fargo & Co (NYSE:WFC) has been considered the most financially-sound bank in the industry. During 2008, it acquired Wachovia and essentially doubled its size. Investors should not fear the interruption of any payouts from Wells Fargo in the next few months.
Citigroup Inc (NYSE:C)
Citigroup Inc (NYSE:C) has a much smaller settlement obligation of $500 million. It recently posted its first quarter earnings results of $1.23 per share. Its revenue beat estimates by almost $500 million, coming in at $20.5 billion.
The company has a strong balance sheet and has been lowering its allowance for bad debts. In the last year, it lowered this allowance by 18% by reducing asset losses. As it continues to reduce these toxic assets and loans, the company will be able to redeploy the $23 billion it has in this reserve.
The bank has been rehabilitating its balance sheet under the guidance of its new CEO and is on track to future growth and future economic health.
Final thoughts
The settlement has been going on for the last few years. Now that banks are actually paying out the settlements, investors may be wondering if this means anything is changing. From the examples here, the payouts won’t make drastic changes to the economics of each company. Of these three, Wells Fargo is still my top bet.
The article The Check Is in the Mail, Now What? originally appeared on Fool.com and is written by Austin Higgins.
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