Whatever they gained from the foreclosure settlement, the top five mortgage servicers are incurring little pain for it.
Each company says it has already set aside reserves to pay its share of $5 billion in cash payments to individual states and the federal government. The banks' reserves also cover cash payments to borrowers who have gone through foreclosure.
Meanwhile, the "soft money" payments in the form of refinancings and principal reductions likely will be recognized over the next several years — softening, as it were, the financial blow.
Fred Cannon, co-director of research and chief equity strategist at Keefe, Bruyette & Woods Inc., says the banks have reserved for losses "in a significantly greater amount than the actual realized losses" to date on loans that are stuck between delinquency and foreclosure.
"Those writedowns and reserves should cover some significant amount of the 'soft' dollar expense," Cannon says.
The settlement will not change the outcome of loans currently in the process of foreclosure, of completed foreclosures or of prior loan modifications that have been denied. Citigroup Inc. was the only company that had to take a charge against earnings.
Overall, the settlement agreement will have no material impact on the top five banks' profitability or on their financial results in the future, each of the banks says, and their stock prices were little changed in afternoon trading.
Bank of America Corp., which is expected to pay the lion's share of the agreement, says it "has adequately reserved for the settlements" as of Dec. 31. It has set aside enough reserves to cover the $3.2 billion cash payment to state and federal agencies, says a B of A spokesman, Dan Frahm.
JPMorgan Chase & Co. set aside litigation reserves over the past five quarters to cover its $1.1 billion cash payment. The bank also will incur some additional operating costs to implement the new servicing standards required by the deal, but the financial impact "will not be material," says Kristin Lemkau, a JPMorgan Chase spokeswoman.
Wells Fargo & Co. says its $1 billion payment has already been accrued for and was reflected in its year-end financial results.
Ally Financial Inc. says it has set aside reserves to cover its $110 million cash payment and $200 million in borrower relief. The company says in a press release that "the financial impact of the agreement will not be material on financial results for the first quarter of 2012 and future periods."
Citi says it will adjust fourth quarter and full year 2011 financial results to reflect an additional $84 million after-tax charge to cover its $415 million cash payment to the states and federal government. It also will take a $125 million after-tax charge in connection with the resolution of related mortgage litigation. Citi is expected to provide $1.8 million in borrower relief.
The banks will pay $3 billion to help underwater borrowers refinance into cheaper loans and those refinancings will result in lower yields on assets as banks reduce interest rates for borrowers.