2nd UPDATE: US Banks Have Reserved For Mortgage Settlement

NEW YORK (Dow Jones)--J.P. Morgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) said Thursday they have reserved for their respective $5.3 billion shares of the settlement that big banks reached with the Justice Department, the Department of Housing and Urban Development and 49 state attorneys general.

The long-awaited $26 billion settlement involving the nations' largest companies collecting mortgage payments and executing foreclosures is a relief to investors because it removes some uncertainty about the financial impact of the foreclosure trouble.

But analysts warned that other litigation still looms, and that banks will still have to struggle with investors in mortgage-backed securities who demand that the banks buy back soured loans.

Financially, at least, shareholders likely won't have to bear new costs for Thursday's settlement.

"Given the extended length of time over which negotiations took place, we expect that the five largest servicers have largely provisioned for the cost of this settlement," RBC Capital Markets analysts wrote in a research report. "Thus, we expect little, if any, impact to our bank income statements."

J.P. Morgan's share of the settlement is $5.3 billion, the same as for Wells Fargo. Bank of America Corp. (BAC) is bearing the biggest share, $11.8 billion; Citigroup Inc. (C) has to pay $2.2 billion, and Ally Financial Inc. must pay $310 million.

Citi, in a statement, said that it will take $209 million in retroactive fourth-quarter charges, but added that its existing reserves "will be sufficient to cover customer relief payments and all but a small portion of the cash payment called for under this settlement."

A spokeswoman for J.P. Morgan said in a statement that the bank has set aside the estimated cost of Thursday's $26 billion settlement in previous quarters.

"We will incur some additional operating costs to implement the new servicing standards," but those "will not be material," she said.

Bank of America didn't immediately comment on the settlement or its reserves for the financial impact.

Citi, in a statement, said existing reserves "will be sufficient to cover customer relief payments and all but a small portion of the cash payment called for under this settlement." However, the bank said it will adjust fourth-quarter earnings to reflect a charge of $84 million.

Ally said it doesn't expect the financial impact of the agreement to be material, a spokeswoman said. The lender took a charge of $270 million in the fourth quarter for expected foreclosure-related penalties.

Wells Fargo, in a press release, said it "had fully accrued" for the following elements of the settlement that affect the company: a $900 million refinance program, a $3.4 billion relief program for consumers who experience financial hardship and $1 billion paid to the federal government.

"The Refinance Program will not result in any current-period charge as the impact of this program will be recognized over a period of years in the form of lower interest income as qualified borrowers benefit from reduced interest rates on loans refinanced under the program," Wells Fargo said.

However, the settlement will reduce interest from mortgage lending for years because borrowers benefit from reduced interest rates on loans refinanced under the program, Wells Fargo and Citi said.

Wells Fargo Chief Financial Officer Timothy Sloan told investors during a Credit Suisse Financial Services conference in Miami that the settlement is good for customers and shareholders. "We are very pleased with the settlement, we are pleased to put this behind us," he said.

Shareholders responded somewhat indifferently. Bank of America's stock rose 1.85%; shares of J.P. Morgan, Citi, and Wells Fargo fell, but all less than 1%. While shares of tobacco companies fell after the big 1998 settlement, bank stocks likely won't take a hit following the settlement because banks have reserved for the financial impact, Keefe, Bruyette & Woods said in a research report.

"While the settlement likely reduces future liability related to foreclosure matters, the agreement does not reduce future liability related to securitization activities, federal or state criminal claims, or claims brought by individual homeowners," wrote Wells Fargo Securities analyst Matthew Burnell, who follows Bank of America and J.P. Morgan Chase.

J.P. Morgan said in a regulatory filing that the settlement releases the bank "from further claims related to servicing activities, including foreclosures and loss mitigation activities," but that this doesn't include securitization matters or New York Attorney General Eric T. Schneiderman's suit against Bank of America, J.P. Morgan Chase and Wells Fargo over a private national mortgage electronic registry system, MERS.

Mike Heid, president of Wells Fargo Home Mortgage, said in an interview that the issues surrounding housing and the economic recovery "are very broad, very complex," and "there is no one action, no one solution that takes care of all of that."

He declined to discuss the New York state suit about MERS, but said, "The spirit of cooperation that was achieved through that settlement approach I would believe could and should carry forward in a lot of other ways."

Further, there was no word Thursday about regional banks signing on to the settlement. Last month, PNC Financial Services Group Inc. (PNC), SunTrust Banks Inc. (STI), and U.S. Bancorp (USB) said they put aside reserves for the settlement. "We anticipate investors may hear more news on these companies later on in the process," RBC analysts said.

-By Matthias Rieker, Dow Jones Newswires; 212-416-2471; matthias.rieker@dowjones.com

--Nick Timiraos and Andrew R. Johnson contributed to this article.

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