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Biggest Mortgage News for Banks Yet to Come


Monday has been a busy morning for banks.

First, Bank of America (NYSE:BAC) entered into a $10.3 billion settlement with Fannie Mae (OTC:FNMA) over souring mortgages it sold to the housing finance giant in the run up to the crisis.

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While Bank of America will take a $2.5 billion pre-tax charge in connection with the settlement, the stock is up slightly as it resolves yet another legal overhang for the bank.

Then the Office of the Comptroller of Currency (OCC) and the Federal Reserve announced a $8.5 billion settlement with the ten major lenders that would provide broad relief to borrowers who were foreclosed upon in 2009 and 2010, while terminating an independent foreclosure review process that had proved too expensive.

The banks, including Bank of America, JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) will pay $ $3.3 billion in direct payments to eligible borrowers and $5.2 billion in other assistance, such as loan modifications and forgiveness of deficiency judgments. The agreement covers 3.8 million borrowers whose homes were in foreclosure in 2009 and 2010 with the participating servicers.

The settlement comes nearly a year after a separate $26 billion mortgage settlement with the five biggest banks in relation to the "robo-signing" scandal. Only $1.5 billion of that settlement was in the form of direct cash relief to 750,000 borrowers.

But the more significant development for the mortgage market may, however, be the Consumer Financial Protection Bureau's announcement of the "qualified mortgage rule," expected on Wednesday.

The long-awaited rule is expected to provide some clarity to mortgage lenders and loosen credit, but the devil may be in the details.

Under Dodd Frank, lenders are prohibited from making loans unless they have determined that the borrower has the ability to repay that loan. The qualified mortgage rule will define what counts as a safe mortgage. It will also offer some legal protection to lenders who make qualified mortgages.

But it is the nature of the protection that has been the subject of great debate in the mortgage industry.

Lenders will be hoping for a "safe harbor" provision that will offer legal protection against lawsuits in the event of foreclosure, so long as the loan meets the qualified mortgage standard.

However, some lawmakers have been arguing for a "rebuttable presumption" standard, which allows borrowers to challenge the foreclosure in court, by submitting evidence that the lender did not accurately assess their ability to pay.

The latter would be less positive for banks, as the risk of litigation is still present. Analysts fear that banks could become overly cautious in their underwriting, cutting off credit to those who don't conform to the highest standards.

The qualified mortgage rule will also set the foundation for the qualified residential mortgage rules which has implications for the secondary mortgage market. That rule, expected later this year, will help determine which loans are exempt from a Dodd Frank rule that requires banks to retain 5% of assets that are securitized on their balance sheet.

Stay tuned because bank stocks may be in for a wild ride.

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