New York Attorney General Eric Schneiderman has announced that the state may sue Wells Fargo (NYSE: WFC ) and Bank of America (NYSE: BAC ) in the months ahead for violating the mortgage settlement agreement that numerous banks reached last year with 49 states and the federal government. Since a lawsuit has yet to be filed, the markets don't seem to be reacting to the news -- both banks remain relatively unfazed.
Lawsuits are usually bad
In the not so distant past, a new lawsuit was often met with a negative market reaction, with Bank of America's performance usually the one suffering. In fact, the bank's many legal problems are often cited as the bear case to avoid the bank, despite its strong performance over the past year. Its performance yesterday as a result of its settlement with MBIA helps illustrate how much investors take note of its legal situation.
Wells Fargo has avoided many of the same problems despite similar lawsuits, and is often viewed as the least worrisome of the "too big to fail" banks that dominate the headlines. As the nation's largest mortgage lender -- including $109 billion during the first quarter of 2013 alone -- Wells Fargo seems content avoiding some of the riskier practices that warrant big headlines at some of the other banks and focusing on the business of mortgage writing.
Nevertheless, when news surfaces about its bread and butter business, investors should take note and ensure that the bank is doing everything it can to comply with the settlement it reached last year. If Wells Fargo and Bank of America have violated the settlement agreement, it would be in their best interest to address the complaint.
Settlement monitor should come first
Under the terms of the settlement, the mortgage servicers are afforded the opportunity to work with the settlement monitor to address potential violations before being sued to fix the errors. In this regard, Schneiderman may be jumping the gun a bit, but he also has a duty to protect the citizens of New York in matters such as this, and stated that he only seeks an injunction requiring the banks to comply with the settlement, and not any damages or pernalties.
The settlement monitor, former North Carolina Banking Commissioner Joe Smith, said he appreciates Schneiderman's interest in the issue, and that he is in the process of reviewing the banks' compliance, with a report of his findings coming in June . This report could be the final impetus for Schneiderman to follow through on his lawsuit, so perhaps the market is giving the banks the benefit of the doubt in the meantime.
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