Another Reason to Avoid U.S. Banks

The other big news concerned banks here in the U.S., and the possible resolution of massive lawsuits hanging over their heads from the mortgage meltdown.

Foreclosure Gate, Robo-Signing or whatever you want to call it, looks like it’s coming to an end. If an agreement is reached, this will be the biggest multi-state settlement since 1998.

For some time now, we’ve been hearing about how several of the nation’s largest banks are under fire for foreclosure abuse. Well, this morning 49 state attorneys general and the federal government revealed that all parties have reached a $25 billion settlement. This represents a hefty chunk of change, so I’m going to take a moment to go over the facts, and then explain what this means to us as investors.

Five major mortgage servicers have been accused of a number of irresponsible practices leading to millions of foreclosures and caused trillions in underwater loans. Instead of dealing with the bottleneck of individual homeowners suing the banks, the banks and the states have agreed to one hefty settlement. The $25 billion figure announced will be put towards several uses:

* Compensation for those who were improperly foreclosed on.

* Reduction of mortgage principle for borrowers that are at risk for default.

* Refinancing initiatives.

* Repayment of public funds lost due to servicer misconduct.

This settlement also includes a set of new rules that prevent “robo-signing” or completing foreclosure documents without proper diligence and safeguards. In addition, the feds are going to try to get an additional nine mortgage servicers to sign onto the terms of this settlement. In that case, it could increase the entire deal to $30 billion.

While the settlement won’t actually have a big impact on those improperly foreclosed on or put money back into the real estate industry, it does give some investors a chance to breathe a sigh of relief. The threat of litigation has been hanging over the heads of these banks for some time now, so there may be a brief rally when the banks can pay up (most have already reserved the funds to pay this settlement).

But I’m not going to be a buyer of bank stocks, and neither should you.

In my opinion, the fact that there even is a $25 billion settlement at all  just shows how dodgy the U.S. banking industry really is. Don’t forget, there still is a good chance that a number of class action lawsuits will follow against the banks—there are plenty of securities law violations and abuses that weren’t addressed by this settlement.

So, if you’re thinking about plunking your money into banks like Bank of America Corp. (BAC), J.P. Morgan Chase & Co. (JPM), Citigroup Inc. (C) or Wells Fargo & Co. (WFC), stay away—there’s good reason why none of these stocks score higher than a “C” in Portfolio Grader.

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