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.
Meanwhile, the Federal Energy Regulatory Commission (FERC) approved a $410 million deal with JPMorgan Chase & Co. (NYSE:JPM)’s Ventures Energy subsidiary related to allegations of market manipulation in electricity markets.
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.