Our Bank of America (BAC) and JPMorgan Chase (JPM) are two of the three largest U.S. mortgage servicing banks that have failed to comply with the terms of the mortgage settlement agreement according to the compliance report filed December 4, 2013 in the federal court of Washington, D.C.
This result is the second time this year that the two banks have been unable or unwilling to fulfill their obligations to comply with the requirements defined under the $25 billion settlement. Citigroup (C) is the third of the trio that has been cited for non-compliance.
The settlement was with the federal court and 49 state attorney generals regarding problems during the mortgage crisis of 2006 to 2011. Part of the agreement was a list of hundreds of new standards for loan modification and the foreclosure process. In addition, the mortgage banks were required to pay $5 billion in fines and were also required to provide refinancing and write downs that may cost the banks another $20 billion.
JPMorgan and Bank of America both failed to fulfill some basic measures of the settlement, including properly informing customers that foreclosure proceedings were beginning. In addition, they failed to make timely decisions on loan modifications and short sales, terms that were specifically required in the settlement terms. During the first six months of the year, the banks were unable to comply with six metrics, and during the second half of the year, one metric. That only one metric was missed in the second half does not necessarily speak of improvement, however, any metric missed in the first half of the year was not tested in the following period and may continue to be remiss as the year progressed.
What's the Problem?
BAC and JPM appear to be having problem implementing the new requirements into their systems, and consumers are still having problems getting responses to their requests for loan modification, short sales and proper paperwork for the initiation of foreclosure proceedings. Re-establishing trust with their customers seems to be an ongoing public relations problem for these banks, which will continue until they have been able to successfully implement the new loan requirements into the structure of their system.
The news about these banks' failure to comply with agreed upon regulations puts them in a precarious position for the future. If they can't, or won't, institute these changes expeditiously, they leave themselves open to new fines that will further encroach on profit margins, making it harder for them to take advantage of the expanding opportunities in the recovering economy.
We believe that investors should continue to take some profits in the mega banks and reallocate the money to banks like U.S. Bancorp (USB) which Goldman Sachs just added to their conviction list today and Berkshire Bank (BHLB) which we have written about recently here.
Both of these financial institutions have good management and they pay their shareholders a solid dividend.