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Will litigation boost bank fees?

By Claes Bell, CFA · Bankrate.com
Friday, September 2, 2011
Posted: 11 am ET

Ready to see a "litigation surcharge" on your next bank statement? Well, it may not literally say that, but don't be surprised if fee increases get a little nastier thanks to a new wave of litigation against banks.

Nelson Schwartz of the New York Times writes the Federal Housing Finance Agency is readying a fusillade of new lawsuits against major banks:

The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation.

The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.

The suits stem from subpoenas the finance agency issued to banks a year ago. If the case is not filed Friday, they said, it will come Tuesday, shortly before a deadline expires for the housing agency to file claims.

The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers' incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.

As Schwartz notes in the article, this comes on the heels of the robo-signing lawsuits brought by state attorneys general that will likely result in massive settlements paid to the states. Together this adds up to billions of dollars worth of legal liability for many of the country's biggest banks.

While it might provide some satisfaction to those burned by the housing crisis, and, according to the article, provide some funds for mortgage write-downs, it probably isn't great news for checking and savings accountholders at the banks in question. That money has to come from somewhere, and the costs of litigating and settling those lawsuits will probably get passed on to them in the form of more and higher fees.

To me, there's an argument to be made here for holding individuals, rather than corporations, responsible for financial misconduct. Suing the banks themselves seems a little like getting injured in a hit-and-run and then suing the car the negligent driver ran you over with. Regardless of what the Supreme Court thinks, a corporation is not a person. It doesn't learn from its mistakes, and it doesn't feel fear. I don't believe suing a corporation provides an effective deterrent for making future questionable choices.

Instead, let's spare checking and savings accountholders the bill and have the attorneys general send it to the individuals who made the decisions to fudge mortgage documents or mislead investors about mortgage-backed securities in the first place. It's a win-win: Attorneys general get plenty of money in fines and a more effective deterrent, and bank customers get to keep their banking costs a little lower.

What do you think? Will you get smacked with higher fees for this? Do you think that's fair?

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2 Comments
Bobina
September 06, 2011 at 7:30 pm

After working in a legal office for 10 years, all I have to say about this mortgage fiasco is "litigation helps no one but lawyers." I am a homeowner who is stuck with a house that has depreciated in spite of major improvements over the last 4 years due to several foreclosures in our neighborhood. Not only do we have to see our neighbors lose their jobs, then their homes, we have to watch our home's value drop while we continue to pay on a mortgage that is inflated. We tried selling. That was just a waste of our realtors money. As much as I would like for the big banks to pay for their mistakes, I know that will not happen. I think the best outcome would be to mandate that the banks take care of the properties that they seize in foreclosure.

Georgie
September 02, 2011 at 1:07 pm

I think we'll get the fees but it's not fair!!