Penalties for two big European banks carve out a bigger portion for loan modifications

By AnnaMaria Andriotis, Aruna Viswanatha and Gabriel T. Rubin 

Billions of dollars of relief may be on the way for borrowers who got mortgages before the housing bust.

Deutsche Bank and Credit Suisse agreed to pay consumers $4.1 billion and about $2.8 billion, respectively, as part of settlements they struck with the federal government this week over their handling of mortgage-backed securities before the housing meltdown.

The two settlements, totaling $12.5 billion, are the latest penalties in a long-running series between the Justice Department and large banks over their role in deceptively selling billions of dollars of subprime mortgages as safe securities, exacerbating losses for investors nearly a decade ago. The settlements are notable in part because consumer relief accounts for a greater share of the total fines compared with many previous agreements and consumer advocacy and other nonprofit groups aren't expected to get a piece of the funds.

The relief funds will go toward loan modifications, similar to the framework in the settlement reached between Goldman Sachs and the Justice Department in April, according to people familiar with the negotiations. Loan modifications in that agreement included forgiveness of certain unpaid mortgage balances and forbearance to struggling borrowers, including those who owed more on their mortgage than their home is worth.

Payments to nonprofits and community groups -- a staple in many of the U.S. government's early mortgage settlements and a sticking point for many Republicans -- aren't expected to be included in these settlements, according to the people.

Justice Department settlements over toxic mortgage securities with Bank of America, J.P. Morgan Chase & Co., and Citigroup Inc., among others, included provisions that require the banks to turn over unpaid consumer relief funds to consumer advocacy nonprofits that focus on affordable housing, legal aid help to low-income borrowers and other groups. That provision was excluded from the Justice Department's settlement announcement with Goldman Sachs.

The exclusions could mark a turning point for how the consumer-relief portion of mortgage settlements are structured.

The settlements could also be a hot spot for the incoming administration. In September, the House voted almost entirely along party lines to restrict payments to third-party groups as part of Justice Department settlements, saying the arrangement subverts Congress's spending power and gives money to left-leaning activist groups with little oversight. The Obama administration threatened to veto the bill, saying it "seeks to address a problem that does not exist, " and the Senate didn't take it up. Republicans plan to move forward with new legislation on the issue early next year, a House Judiciary Committee aide said.

Consumer payouts have been a signature piece of most of the crisis-era mortgage settlements. The terms of these deals and how successful they have been at actually getting money to borrowers, however, have come under fire from some consumer advocates and Republicans.

Billions of dollars have been allocated to help borrowers in Justice Department settlements over toxic mortgage securities. Goldman Sachs agreed to pay out $1.8 billion to consumers earlier this year, Bank of America agreed to $7 billion in 2014 and Citigroup agreed to $2.5 billion the same year. J.P. Morgan agreed to pay out $4 billion in 2013.

"Everybody is focused on the big number but where the money actually lands and how it lands and if it is really hard money or not is something very different," said Basil Petrou, managing partner at Federal Financial Analytics. Both Deutsche Bank and Credit Suisse are still ironing out the details of their settlements with the U.S. government.

The relief from many mortgage settlements often ends up being a bookkeeping item for the banks. One common tactic has been for the banks to deduct the amount of unpaid balances for mortgages tied to homes that went into foreclosure from the relief fund, said Geoff Walsh, staff attorney at the National Consumer Law Center.

Loan modifications get doled out, though those rarely are offered to the borrowers who need it the most, he said, but rather focused on areas where property values have yet to stabilize. That can help banks lessen the chances of borrowers walking away from the house. "We've never seen rhyme or reason why [certain] borrowers get chosen and others don't," he said.

President-elect Donald Trump hasn't weighed in on the issue of how bank fines are doled out, though he has noted his antipathy for bank settlements in the past. "What happened to the days when you actually go to trial?" he said in a 2013 interview.

--Jenny Strasburg contributed to this article.

Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com, Aruna Viswanatha at Aruna.Viswanatha@wsj.com and Gabriel T. Rubin at gabriel.rubin@wsj.com

 

(END) Dow Jones Newswires

December 24, 2016 02:47 ET (07:47 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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