Mortgage Settlement 2Calling the settlement a reproach for “years of reckless underwriting” at Wells Fargo, U.S. Attorney Preet Bharara in Manhattan announced on April 8th that Wells Fargo & Co. formally reached a record $1.2 billion settlement of a U.S. Department of Justice lawsuit. A notable feature of the settlement is Wells Fargo’s specific admission that it deceived the U.S. government into insuring thousands of risky mortgages. The settlement with Wells Fargo, the largest U.S. mortgage lender and third-largest U.S. bank by assets, was filed on Friday in Manhattan federal court. According to the settlement, Wells Fargo “admits, acknowledges, and accepts responsibility” for having from 2001 to 2008 falsely certified that many of its home loans qualified for Federal Housing Administration insurance.

The lender also admitted that from 2002 to 2010, it failed to file timely reports on several thousand loans that had material defects or were badly underwritten, a process that one of its executives, who was also sued in this litigation, was responsible for supervising.

According to the Justice Department, the shortfalls led to substantial losses for taxpayers when the FHA was forced to pay insurance claims as defective loans soured.

Several lenders, including Bank of America Corp., Citigroup Inc., Deutsche Bank AG and JPMorgan Chase & Co, have previously settled similar federal lawsuits. Wells Fargo had held out, and its payment is the largest in FHA history over loan origination violations.

The agreement to pay the penalty and admit to deception also resolved a probe by federal prosecutors in California of alleged false loan certifications by American Mortgage Network LLC, which Wells Fargo bought in 2009.

No one has been criminally charged in the probes, but the Justice Department reserved the right to pursue criminal charges if it wishes, according to the settlement announcement.

To its great credit, Wells Fargo has in recent years been far more restrained than some of its peers in seeking to foist its losses on the correspondent lenders who sold loans to larger financial institutions—like Wells and those peers—pursuant to the larger lenders’ non-traditional, relaxed underwriting requirements in the years leading up to the mortgage crisis. A sad irony in this area of mortgage banking litigation is that two of the most spectacular failures as financial institutions—due in large part to their extraordinary recklessness with respect to their loan products, lack of appropriate controls, and tremendous appetites for securitizing loans—fell into bankruptcy, have essentially avoided punitive governmental investigations and lawsuits, and now zealously pursue alleged “damages” from virtually any surviving lender that sold them loans.  Admissions by Lehman Brothers and RFC/ResCap of their rather self-evident responsibility for all that went awry at their companies would be more welcome, and justified, than their current courses of action.