Mortgage Settlement Just the Start of Trouble for Bank of America (NYSE: BAC) and Friends

The biggest U.S. mortgage lenders, including Bank of America Corp. (NYSE: BAC), finally reached a $25 billion mortgage settlement to help homeowners - but the banks still face years of legal battles and billions of dollars in costs.

The provisions to the mortgage settlement include:

• $5 billion total in cash penalties, payable to borrowers, states, and the federal government.
• $20 billion in additional aid, through reducing homeowners' loan balances, and refinancing for underwater homeowners who are current on their loans.

Bank of America�Price History (NYSE: BAC)

Bank of America will pay an additional $1 billion to settle claims that it inflated appraisal prices from 2003-2009.

The multi-billion dollar mortgage settlement ends state and federal investigations into improper foreclosure procedures (like robo-signing), but banks can still get hit with criminal enforcement actions due to lending practices and mortgage-related securities.

"It's a big check with narrow immunity," Paul Miller, an analyst with FBR Capital Markets and a former Federal Reserve examiner, told Bloomberg News. "You get the state attorneys general off your back, but you're not getting immunity from securitizations, which could come with their own steep cost down the road."

Why the $25 Billion Mortgage Settlement is Just the Start The five main players in the mortgage settlement are Bank of America, JPMorgan Chase & Co. (NYSE: JPM), Wells Fargo & Co. (NYSE: WFC), Citigroup Inc. (NYSE: C), and Ally Financial Inc. These five banks handle payments for 55% of all outstanding home loans, according to Inside Mortgage Finance.

In order to get the deal rushed through after 16 months of negotiations, the banks opted for a broad mortgage settlement that kept them liable for other misconduct.

"Because of the narrow nature and the fact that the banks didn't get the widespread assurances they were seeking, this was mostly meaningless," David Lykken of Mortgage Banking Solutions told Bloomberg.

The other liabilities include packaging bad loans into securities and allowing billions of dollars in investments to fuel a market vehicle designed to collapse. The mortgage settlement also won't prevent states from pursuing claims regarding banks' database use to conduct foreclosures.

New York Attorney General Eric Schneiderman is determined to hold big banks accountable. He filed a lawsuit Feb. 3 against Bank of America, JPMorgan, and Wells Fargo for fraudulent use of the Mortgage Electronic Registration Systems, or MERS. Schneiderman claims use of the mortgage-registering database sped up the process of bundling bad mortgages into securities.

"The conduct that led to the crash is still fair game," Schneiderman told The Washington Post. "I'm confident the releases are narrow enough so our investigation into misconduct should produce more significant relief going forward."

U.S. President Barack Obama pledged support in his State of the Union address Jan. 24. He announced the creation of a mortgage crisis unit to investigate the real estate lending actions of big banks.

Be Wary of a BAC RallyBank of America and the other firms aren't likely to see a big hit to earnings with this deal. Institutions have marked down their balance sheets to account for reducing loan balances.

Financial stocks rallied after the mortgage settlement news broke. BAC rose 4%, continuing its 45% climb for 2012.

But the uncertainty surrounding the remaining liability, and how much it'll continue to cost them, will put downward pressure on share prices this year.

Further investigations and settlement costs could exceed the amount banks have earmarked, and Bank of America is rumored to have the most exposure to mortgage-related legal fallout.

Banking analyst Richard Bove from Rochdale Securities LLC told Bloomberg that banks could still face quarterly legal fees of up to $2 billion.

"What we're going to see for the next five to seven years is these lawsuits going through court after court," said Bove.

The five biggest lenders have already racked up about $72 billion in faulty mortgage-related costs, with Bank of America paying the most.

BAC was down 1.22% to $8.08 by 1 p.m. Friday.

News and Related Story Links:

• Money Morning:
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• Money Morning:
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• Bloomberg News:
  $25B Mortgage Deal Doesn't Let Banks Off Hook
• The Washington Post:
  Schneiderman: Settlement deal a `small' but `significant' step towards real accountability