We've only just begun.That was clear message delivered Thursday by state and federal officials announcing a $25 billion mortgage servicing settlement.
While the deal will allow the industry to put the robosigning scandal behind it, multiple state and federal officials — including President Obama — put the banks on notice that this is just the first step in pursuing civil litigation and criminal prosecutions in connection with misdeeds before, during and after the financial crisis.
"Know that this is neither the beginning nor the end of our work to hold banks and other institutions accountable for the destruction they've caused our families, communities and country," Illinois Attorney General Lisa Madigan said at a press conference at the Justice Department Thursday morning. "Today's settlement should serve as a warning for financial institutions: there are consequences for engaging in practices that jeopardize the stability of our communities and our economy."
Madigan's state and federal counterparts reiterated her pledge throughout the press conference, touting the extensive investigations that led to the servicing settlement, as well as the recent efforts to coordinate investigations into the packaging and sale of mortgage-backed securities.
"This is just one step in making sure we right the wrongs of this crisis," Secretary of Housing and Urban Development Shaun Donovan said.
Associate Attorney General Tom Perrelli said "our work will not be finished" once the agreement is filed in federal court in the coming weeks.
"This team — the team you see here and many folks around the country and in the audience — is going to continue and continue to try and ensure that we obtain complete redress for all the harm brought to the American public in the housing crisis," Perrelli said.
Even Obama, in the midst of praising the deal, made it clear it was the tip of the iceberg.
"This settlement also protects our ability to further investigate the practices that caused this mess. And this is important," he said. "The mortgage fraud task force I announced in my State of the Union address retains its full authority to aggressively investigate the packaging and selling of risky mortgages that led to this crisis. This investigation is already well underway. And working closely with state attorneys general, we're going to keep at it until we hold those who broke the law fully accountable."
Observers agreed the announcement of a final deal, more than a year after banks began negotiating with the state AGs, means the banks can finally put the robosigning saga behind them.
But they said the number of unresolved issues, and the zeal with which officials continue to go after the banks, is unsettling.
"This is a mere small piece of a much bigger litigation threat that will overhang the big banks for a decade or more," said Jaret Seiberg, an analyst with Guggenheim Partners LLC.
Tim Rood, a partner with the Collingwood Group in Washington, said that at first blush, the deal seems to provide some relief for banks that have grappled with unresolved settlement issues since the robosigning scandal first made headlines in 2010.
"But then as you . . .look basically at what civil and criminal charges still loom, I don't know how long I would be comforted," Rood said.
The settlement would provide $20 billion in direct relief for borrowers — including at least $10 billion for principal write-downs — and $5 billion in cash payments to the states and federal government for restitution for foreclosed borrowers and other housing programs. It would also establish new servicing standards that will be enforced by an independent monitor.
But Attorney General Eric Holder said officials took steps to ensure that the claims they were releasing through the settlement would not interfere with their ability to move current investigations and prosecutions forward, and advance the work of the Financial Fraud Enforcement Task Force.
Although the agreement resolves civil claims based on mortgage servicing, it does not prevent state and federal authorities from pursuing criminal enforcement actions.
And it preserves "extensive" claims related to mortgage securitization activities, Holder said, including the claims that will be investigated by the Justice Department's new Residential Mortgage-Backed Securities Working Group. The states also retained their rights to bring actions related to securitization activities and MERS.
"By focusing on collaboration — and by bringing out government's full enforcement resources to bear — we can improve our ability to identify and prosecute misconduct in our financial markets, recover losses, prevent fraud and hold those who violate the law accountable," Holder said.
It also preserved the ability of officials to pursue loan origination claims.
Under the agreement, the government retains its full authority to recover losses and penalties caused when a bank failed to satisfy underwriting standards on government-insured or government-guaranteed loan, with the exception of certain fault origination practices by Bank of America on Federal Housing Administration (FHA)-insured loans, which were resolved as part of the settlement.
The settlement also does not prevent any claims by individual borrowers who want to bring their own lawsuits, or join a class action lawsuit.
Most observers saw this as the first of many potential settlements, especially if state or federal officials are able to bring criminal charges against any financial institutions or executives.
"Clearly the administration is looking for perp walks," Rood said. "If they find criminal activity for a major originator and they hold accountable any of the principals of those organizations criminally, I think that will be probably be the genesis of more and meaningful settlement negotiations for the origination and the private label securities side."
Rood said it's also significant that the settlement doesn't cover any of the GSE or private-label securities, and said banks will still be exposed to origination related to any kind of unfair or deceptive acts or practices associated with the origination of those loans.
"Those are not inconsequential areas," he said.
Brian Gardner, an analyst with Keefe, Bruyette & Woods, said the banks likely won't be waiting long for their next lawsuit, as the statute of limitations is running out for many of the claims relating to conduct that occurred before the crisis.
Indeed, New York Attorney General Eric Schneiderman — who is leading the Justice Daprtment working group — wasted no time filing a lawsuit last week against Bank of America Corp., Wells Fargo and JPMorgan Chase, alleging that the banks' MERS database led to improper foreclosures.
Reports also surfaced Wednesday that several banks received so-called Wells notices from the Securities and Exchange Commission (SEC), which uses the notices to warn banks that it is considering bringing an enforcement action or lawsuit.
"I suspect that what we saw from the SEC last night is just the beginning of what will be a flurry of lawsuits over the next couple weeks or months," Gardner said.
The tough tone of the press conference also had political undertones, observers said.
Some attorneys general have faced enormous pressure from their constituents to reject any deal that wasn't hard enough on banks, and didn't allow for full investigations into mortgage-related misconduct. The administration has also fielded criticism from liberal groups that it hasn't done enough to help troubled borrowers, rejuvenate the struggling housing market or hold banks accountable.
In addition to reiterating their continued work to bring future claims, they also distributed lists of the various investigations — by Justice Department's U.S. Trustees program, Department of Housing and Urban Development Inspector General, FHA and U.S. attorney's offices, to name a few — that helped produce the settlement.
"It has all the feeling of trying to respond to your critics and preempt or answer all the criticism," Gardner said.
But the rhetoric could potentially be damaging for banks struggling to find more capital from investors that are increasingly spooked by the threat of more litigation, said Paul Cantwell, a managing director at Alvarez & Marsal.
Cantwell said it's very difficult for the market to know where the next "attack" could come from, because there are so many different players involved.
"No one really knows where it's coming from because each of the AGs is competing to be the most vigorous, the most proactive, and that's part of the issue when you elect legal officials," Cantwell said. "They're playing to the crowd, and the crowd wants to know that someone's being held accountable.