JPMorgan has agreed to pay $5.1 billion to Fannie Mae and Freddie Mac to resolve claims stemming from the housing bubble, federal housing regulators announced Friday.
With Mel Watt at the head of a federal housing-finance regulator, it may be easier for borrowers to get cheaper mortgages and the recently flagging housing-market recovery could get a boost, according to a Wednesday analyst note.
The freshly-confirmed Watt, President Barack Obama’s pick to lead the Federal Housing Finance Agency, is expected to support efforts to increase homeownership through his regulation of mortgage buyers Fannie Mae
/quotes/zigman/226360/delayed /quotes/nls/fnma FNMA and Freddie Mac
/quotes/zigman/226335/delayed /quotes/nls/fmcc FMCC , wrote analyst Jay McCanless of Sterne Agee, a Birmingham, Ala.-based brokerage.
In May, the FHFA had limited the government sponsored enterprises’ acceptable purchases, starting Jan. 10, to those that meet guidelines deemed by regulators as particularly safe, keeping Fannie and Freddie away from mortgages such as those that are interest only or with 40-year terms. But Watt’s support of homeownership could mean that the FHFA allows the GSEs to to buy loans crafted to make purchases more affordable.
“We believe Mr. Watt could revive mortgages designed to be more affordable…which could widen the pool of potential home buyers and spur additional housing demand,” McCanless wrote in a research note.
However, conflicting forces are at work on the housing market. The Senate’s Tuesday confirmation of Watt, a North Carolina Democrat, came just one day after the FHFA told Fannie and Freddie to raise fees for insuring mortgages, a move expected to curb some home borrowing.
But even without Watt at the FHFA’s helm, there’s incentive for lenders to offer a broader array of mortgage products. Since mortgage rates started rising in early May, refinancing applications have plunged, and banks are looking to ramp up revenue from originations of mortgages to purchase a home.
“We view the lack of mortgage refinance business in 2014 versus 2013 as a potential catalyst for an increase in purchase mortgage lending by banks,” McCanless wrote. “We also see the national housing price appreciation and the continued rise in employment over the last two years as catalysts for an increase in purchase mortgage lending over current levels.”
Indeed, a recent report from the Federal Reserve indicated that some banks are easing standards of mortgages.
“Most banks reported that the volume of mortgage refinancing applications received has fallen since the spring, and, in response, some banks have reportedly changed their lending policies and activities in the market for home-purchase loans,” according to the Fed’s report.
This issue has been a point of contention in JPMorgan's negotiations with the Justice Department, which wants to prevent the bank from passing on any settlement costs.
Securities sold by WaMu accounted for roughly $1.15 billion worth of the FHFA settlement.
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Investors initially shrugged off the news, which has been rumored for weeks. JPMorgan shares were up slightly in after-hours trading Friday, and have gained 20% so far this year.
JPMorgan is just one of 18 banks sued by the FHFA back in 2011 over the alleged misrepresentation of mortgage-backed securities, and is only the fourth to reach a settlement.
UBS (UBS) agreed to a settlement with the FHFA in July for $885 million. The agency has also settled with Citigroup (C, Fortune 500) and General Electric (GE, Fortune 500) for undisclosed sums.
JPMorgan is large enough to easily absorb the settlement costs. It's the biggest bank in the nation, with assets of $2.5 trillion and net income of $21.3 billion in 2012.
The bank has been buffeted by legal problems in the past few months, however.
It has paid over $1 billion in fines in connection with last year's "London Whale" trading debacle, and $80 million more over its allegedly unfair credit card billing practices.
In July, the bank agreed to pay $410 million to settle charges that it manipulated electricity prices in California and the Midwest. It is also facing scrutiny over its hiring practices in China and its alleged involvement in the Libor rate-fixing scandal.
JPMorgan posted a loss for the third quarter based on its massive legal expenses. CEO Jamie Dimon called the loss "painful" and warned that litigation costs could continue to be a drag on earnings for several quarters.