(WFC) Wells Fargo & Company Settles Foreclosure Mess

Wells Fargo & Co. (WFC) has reached a $5.3 billion settlement with states and federal authorities over alleged abuses in foreclosure practices. The company along with four other large mortgage servicers––Bank of America Corp. (BAC), Citigroup Inc. (C), JPMorgan Chase & Co. (JPM) and Ally Financial have reached a settlement worth $25 billion in total with the attorneys general from 49 states and several federal agencies.

WFC’s settlement is valued at approximately $5.3 billion for issues related to its mortgage servicing, foreclosure and origination. According to terms of the agreement, it will include $900 million in a refinance program and $3.4 billion in consumer relief programs. Moreover, it will comprise $1.0 billion in foreclosure assistance payment to the federal government and the states which will be used to address the impact of foreclosure challenges.

The deal is a welcome for the homeowners as well as for WFC. The company will be released from claims and allegations related to servicing, modification and foreclosure practices, and also for certain claims associated with the mortgage loans origination. This will reduce the company’s litigation overhang to some extent. Also, a settlement with individual states would have cost the company several billions.

According to WFC, the foreclosure assistance payment has been fully accrued by the company as of December 31, 2011. In addition, payment for the consumer relief program has been covered in its allowance for credit losses as well as in the non-accretable difference associated with the company’s purchased credit-impaired residential mortgage portfolio.

However, though WFC will not incur any charge for the refinance program in the current period, its interest income will bear the brunt over a period of years as qualified homeowners pay reduced interest rates on loans refinanced under this program.

Notably, between January 2009 and December 2011, WFC refinanced more than 3.3 million borrowers and provided trial or completed modifications for more than 728,000 customers. The company has already made a number of changes in its servicing standards and executed several quality assurance, vendor management, and reporting as well as measurement changes. We believe such measures will support the housing market recovery to some extent going forward.

WFC currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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