When the U.S. sues a big bank what happens? I read a Wall Street Journal article titled, “U.S. Sues Wells Fargo for Faulty Mortgages”. It is another government lawsuit against another big bank. It is another attempt at a department of government to make sure the public knows it is doing something. Something that is allegedly for the public good.
I know this story. Here is how it goes.
The lawsuit alleges that the banks made reckless loans knowing they were not quality loans. The allegation will state further that the bank only made the loans knowing that they could dump the loans off on the Feds. This is because the Feds run FHA, FNMA & FHLMC to insure and purchase loans from the banks. So knowing this ready outlet exists, the theory is that the banks made reckless loans. And as a result they should be fined for them. The banks wisely will settle while admitting to no wrongdoing. They know it will be more expensive to fight the lawsuit and prove their innocence. Everyone wins, right? No, everyone loses. The banks lose money, and the banks pass on the cost to future clients. The Feds increase regulation. And that regulation costs money to administer and that cost gets passed onto the clients, etc.
Since 2008 banks have spent the below amounts defending themselves and paying penalties in relation to these lawsuits:
- Bank of America, $39 billion (yes billion, with a ‘b’)
- J.P. Morgan Chase, $21 billion
- Wells Fargo, $9 billion
- Citigroup, $3 billion
- PNC, $2 billion
Does the cost get passed on?
The fines, legal action and overall hassle that the Feds put these banks through will increase the expense, documentation and paperwork required in getting a mortgage approved.
I am not taking a position as to if the banks truly made bad loans on purpose only to knowingly dump them off on the Feds. I have not seen the evidence. But it would seem an odd business model to have a large, accountable, public company like a big bank willfully tell its employees to approve poor quality loans en masse since they can dump them off on the Feds. I can’t see that being policy. And I can’t see that being kept secret in a large organization.
To contact me to discuss your mortgage scenario, mortgage rates, or other mortgage questions, click here to schedule a call or you can email me directly.