U.S. Federal Regulators continue to hit the money center banks with steep fines and penalties and investors should take note. The latest news concerns settlements between the money center banks and an array of federal regulators and agencies.
FHFA Settles with UBS
The Federal Housing Finance Agency (FHFA), the overseer of Fannie Mae and Freddie Mac, announced an $885 million accord with UBS AG (US listing) (NYSE:UBS) last week. The big Swiss bank will pony up $415 million to Fannie and $470 million to Freddie to resolve claims over mortgage backed securities UBS sold to the housing giants between 2004 and 2007. And UBS AG (US listing) (NYSE:UBS) is not alone in the ongoing probe by the regulator.
In fact, the FHFA has been crafting settlements with 18 other lenders for their role in misrepresenting the quality of the mortgage paper sold into the secondary market — a key causal factor of the 2008 financial crisis.
This plea deal comes on the recently reported settlement between Citigroup Inc. (NYSE:C) and Fannie Mae. In this caper, the too big to fail bank ponied up $968 million to cover pre-existing loans and any potential future claims on loans originated and sold to Fannie Mae between 2000 and 2012.
In particular, the settlement concerns 3.7 million mortgage loans that have gone bust and others that may do as the bad paper continues to be flushed form the banking system while Fannie continues to service the loans. The agreement is centered on so-called “legacy repurchase issues” and will also compensate taxpayers who financed the government takeover of Fannie Mae in 2008.
While this payoff was apparently covered by the bank’s existing mortgage repurchase reserves, Citigroup Inc. (NYSE:C) will add another $245 million in the second quarter to that cash pile. In other words, this deal will take a bite out of the bank’s profits.
JPMorgan Chase is next in line
JPMorgan Chase & Co. (NYSE:JPM) has also been negotiating a settlement with the FHFA, in addition to an array of legal and regulatory woes that are nipping at the big bank’s heels. It’s been reported that the mortgage overseer balked an offer made by JPMorgan. This case potentially involves billions of bad mortgages the big bank sold to Fannie and Freddie. While no word of a dollar amount of any settlement is yet to surface, it’s a pretty safe bet any final deal will be for hundreds of millions along the lines of the UBS Deal.
The settlement includes $285 million in penalties and $125 million in ill-gotten gains that JPMorgan Chase & Co. (NYSE:JPM) yanked from California electricity users between September 2010 and November 2012.
The penalties will be forked over to the Treasury Department, while $124 million will be in the form of rebates to injured rate payers in California. It goes without saying that the big bank agreed to the deal without admitting or denying any wrong doing. But this is said to be the largest recapture by FERC since it acquired enforcement powers in the wake of the Enron collapse more than a decade ago.
More than this though is JPMorgan Chase & Co. (NYSE:JPM)’s announcement last week that it is spinning off its commodities business units that buy and sell metals, oil, gas, electric power, and coal. However, it is unclear what pulling out will mean for the company’s bottom line. And the big bank is not alone in dumping some business lines.
Wells Fargo retreats from mortgage joint ventures
Wells Fargo & Co (NYSE:WFC) announced last week that one of its subsidiaries, Wells Fargo Ventures, was pulling out of an array of joint ventures involved in mortgage lending. The bank was said to be taking this action because of enhanced regulatory scrutiny and enforcements by federal regulators. Wells Fargo claims changes in state and federal oversight have made it more difficult for the firm to continue operating these joint ventures. That being said, some observers believe that this move will not have a significant effect on Wells Fargo & Co (NYSE:WFC)’s mortgage production — and the lender is the largest originator still standing in the residential mortgage market.
The bottom line
While this may seem like small potatoes for observers deft at fundamental analysis, the ongoing settlements are “intangibles” for investors in the banking sector to seriously consider. And these are only a few of an array of regulatory actions underway.
Big Banks still have the ongoing Libor manipulation probe to handle while the FHFA settlements will continue to be rolled out. In short, ongoing multi-million dollar payouts will hit the lenders in the wallet and the ongoing regulatory risks are hard to calculate. While banks have been reporting solid results in 2013, investors should remember rule number one: caveat emptor, that is, let the buyer beware.
Kyle Colona has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo & Co (NYSE:WFC). The Motley Fool owns shares of Citigroup Inc. (NYSE:C), JPMorgan Chase & Co (NYSE:JPM)., and Wells Fargo. Kyle is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Federal Regulators and the Banking Sector originally appeared on Fool.com and is written by Kyle Colona.
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