A Huge Sigh of Relief for Wells, Citi, and Bank of America
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Dodd-Frank Act passed in the summer of 2010 unleashed a flurry of new rules on the marketplace and created a new government organization, the Consumer Financial Protection Bureau. Currently, the CFSB is working on a proposal that would benefit a smattering of banks – and potentially help to spur new loans.
The group is exploring the implications of establishing a set of lending guidelines for banks to follow. Known as a “qualified mortgage,” the move would provide a legal shield for lenders, and it would require judges to rule in lenders’ favor should borrowers sue in the event of a foreclosure.
How does this help consumers? It reinvigorates lending.
Who it Affects
According to The Wall Street Journal, “seven major banks have spent more than $76 billion on mortgage-related costs and litigation since 2008.” Taking the average, this works out to be $10.86 billion per bank, and $2.9 billion per bank per year (assuming 3.75 years).
Thus, major lenders Bank of America (NYSE: BAC), JPMorgan (NYSE: JPM), Wells Fargo (NYSE: WFC), and Citigroup (NYSE: C) would all be affected by the new rule change.
Bank of America could use assistance now, as it posted a meager $340 million in net income last quarter. The change would allow B of A to make more loans and worry less about potential backlash from consumers facing defaulted loans.
Like B of A, Citi would also breathe a sigh of relief if the reforms were passed. Citi could use lending assistance – it previously paid a major fine for falsifying mortgage loans that it sold to Fannie Mae and Freddie Mac, and the company would benefit from having strict guidelines in place.
The move would also allow JPMorgan and Wells Fargo to increase lending, a move that could help them boost their already-high returns on equity of 12% and 13%, respectively.
More clear regulations would also help two other groups: borrowers and lenders. Despite having cash to lend, banks have kept credit tight. Protection from lawsuits stemming from qualified mortgages would likely help ease credit back into the market. Also, a set of guidelines could help investors to have a more clear understanding of lending risks.
What it Misses: “Put-backs”
The new regulation covers lawsuits stemming from consumers, but they do not address Fannie and Freddie’s use of put-backs. Fannie and Freddie buy loans from lenders that meet certain standards. However, the two government companies have asked banks to “repurchase $66 billion in mortgages made between 2006 and 2008,” The Wall Street Journal reports.
Also, according to WSJ, one bank even made a loan as far back as 2003 – and the borrower did not default until 2010. However, Fannie told the bank to repurchase the mortgage.
The use of put-backs could hamper new lending, because banks are afraid that Fannie or Freddie could force them to repurchase loans that have already gone bad. A repurchase would essentially be an immediate loss for banks.
The Right Direction
Despite avoiding the put-back issue, the CFPB is moving in the right direction with its new reforms. I am wary of forcing judges to always rule against borrowers, but educating borrowers about their rights before actually lending would be a modest compromise.
In all, if qualified mortgages take effect, banks will be more comfortable lending, and consumers will likely have access to more credit. Together, both would be an obvious boost for the recovering housing market.
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ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
