Wells Fargo Agrees to Settle Mortgage Lawsuit for $125 Million

(July 8, 2011) – In the second major mortgage-backed securities related settlement in as many weeks, Wells Fargo & Co. has agreed to pay $125 million to a group of pension funds to settle a lawsuit over the sale of mortgage pass-through certificates.

Holders of mortgage pass-through certificates are entitled to income payments from pools of mortgage loans or mortgage-backed securities.

A group of investors including pensions fund in Detroit and New Orleans brought a proposed class-action lawsuit in 2009, accusing Wells Fargo and several underwriters of misleading them about the risks of mortgage-backed securities they purchased from 2005 through 2007 worth over $67.5 billion. A federal judge in San Jose, California in 2010 threw out claims against underwriters including Goldman Sachs, JPMorgan Chase, and UBS and narrowed the claims against Wells Fargo.

The proposed settlement agreement “is intended to avoid the distraction and expense of litigation,” Wells Fargo spokesman Ancel Martinez told Reuters. She stressed that the settlement did not constitute an admission of liability or violation of any law.

The proposed settlement, filed on July 6, must still be approved by the court.

On June 29 Bank of America agreed to pay $14 billion to a group of investors who had bought unsound mortgage-backed securities through the bank’s Countrywide Financial subsidiary. If the settlement passes several legal hurdles, including a challenge from a group of mortgage-bond investors who attacked the deal’s fairness, the settlement will be the banking industry’s largest single settlement stemming for the 2008 housing market collapse. Observers at the time noted that Bank of America’s settlement would increase pressure on other banks fending off legal challenges connected to the sale of mortgage-backed securities right before the 2008 market collapse.