State Robo-Sign Settlement Soothes Banks: FBR

Updated with morning market action.

NEW YORK (TheStreet) -- The big banks may finally be able to glimpse a light at the end of the mortgage tunnel.

The mortgage foreclosure settlement between federal regulators, all 50 states' attorneys general, and the largest loan servicers - including Bank of America (BAC) , JPMorgan Chase (JPM) , Wells Fargo (WFC) , Citigroup (C) , and Ally Financial -- "marks the first time in several years that banks have been able to remove a material overhang," according to FBR analyst Paul Miller.

In morning trading, the large servicers' stocks pulled back from earlier gains, as investors anticipated an announcement from the Justice Department.

Bank of America's shares were up 1%, to $8.19. The shares cracked through the $8 barrier on Wednesday, closing at $8.13, and returning 46% year-to-date, after falling 58% in 2011.

Shares of JPMorgan were down a penny to $38.29. The shares closed at $38.30 Wednesday, returning 16% year-to-date, after dropping 20% last year.

Citigroup was down 1%, to $33.94. The shares closed at $34.23 Wednesday, rising 30% year-to-date, following last year's decline of 44%.

Shares of Wells Fargo were up slighlty, to $30.70. The shares closed at $30.63 on Wednesday, returning 12% year-to-date, after a 10% pullback in 2012.

While the details of the settlement haven't yet been announced, having the obstinate California Attorney General Kamala Harris, New York Attorney General Eric Schneiderman, and Florida Attorney Genera Pam Bondi, jump on the bandwagon at the last minute, means that the mortgage servicers can put the "robo-signing" mess behind them, nearly a year after federal regulators handed-down ceases and desist orders.

Miller said it appeared that "it appears that this settlement is likely to be between $25 - $37 billion, most of which will be in 'soft dollar' fines to the largest servicers," including principal write-downs for loans the banks have already sufficiently reserved for.

In exchange for paying "homeowners who were foreclosed upon from 2008-2011 a $2,000 settlement" and agreeing "to refinancing and modification of non-Fannie Mae and non-Freddie Mac loans," the banks will "will receive liability release from narrow servicing liabilities."

Ominously, the "state attorneys general will be free to pursue other mortgage related claims, such as claims related to securitization and will be allowed to use the information obtained in the investigation into robo-signing as part of these investigations," according to Miller, so we can look forward to more press conferences and accompanying hoopla from state attorneys general, keen on grabbing television exposure while taking no risk in attacking the maligned banks.

"The liability release in the settlement is clearly not as broad as the servicers had been hoping to negotiate," Miller said, referring to the likelihood of future claims by the states. The analyst added that "the total dollar amount of the settlement is also more than what the servicers had been hoping to settle for," and media reports have stated that the states "will create an enforcement panel that could continue to keep open future liability on servicing claims."

The banks have been on quite a ride so far this year, with the The KBW Bank Index (I:BKX) rising 15% year-to-date, through Wednesday's close at 45.23.

-- Written by Philip van Doorn in Jupiter, Fla.

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