General Electric may be facing a fine of at least $1.5 billion for the lending activities of its shuttered subprime lending unit, WMC Mortgage.
GE revealed last week that it booked a reserve of $1.5 billion that may be used as a settlement with the Department of Justice over the company’s subprime lending from 2005 through 2007.
The potential settlement stems from an investigation into WMC’s mortgage business that the DOJ launched in late 2015.
According to GE, WMC’s lending activities were part of a wide-ranging DOJ investigation into mortgage activities, specifically subprime mortgages, in the run-up to the housing crisis.
“In December 2015, we learned that, as part of continuing industry-wide investigation of subprime mortgages, the Civil Division of the U.S. Department of Justice is investigating potential violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 by WMC and its affiliates arising out of the origination, purchase or sale of residential mortgage loans between January 1, 2005 and December 31, 2007,” GE said in a filing with the Securities and Exchange Commission.
“The Justice Department subsequently issued subpoenas to WMC and GE Capital, and we are cooperating with the Justice Department’s investigation, including providing documents and witnesses for interviews,” GE added.
But, according to GE, the DOJ has asserted that WMC and GE Capital violated FIRREA rules in connection with the lender’s origination and sale of subprime mortgage loans in 2006 and 2007.
As such, WMC and GE Capital are now exploring whether an “acceptable settlement” can be reached in this matter. As part of that exploration, GE recorded a $1.5 billion reserve to cover the potential settlement.
But GE cautions that reaching a settlement is not a done deal.
“In the event that an acceptable settlement cannot be reached, we believe DOJ would initiate legal proceedings against WMC and GE Capital. WMC and GE Capital believe they would have defenses to any such lawsuit,” GE said.
GE got into the subprime lending business at the height of the boom, buying WMC in 2004. GE got out of the subprime business in 2007, selling off WMC after the bubble burst.
But the company is still dealing with the fallout from its failed move into subprime lending.
In addition to the pending action by the DOJ, GE is also in the middle of a trial that could cost the company hundreds of millions of dollars.
According to the company, closing arguments are soon to happen in a lawsuit brought by TMI Trust Company, a successor to Law Debenture Trust Company of New York, which is asserting claims on approximately $800 million of mortgages, and alleging losses of more than $425 million on these loans.
Closing arguments in this lawsuit are set to take place next month, and GE cautions that the verdict and the potential DOJ fine could lead to the bankruptcy of WMC.
“Given the significant litigation activity and WMC’s continuing efforts to resolve the lawsuits involving claims made against WMC, it is difficult to assess whether future losses will be consistent with WMC’s past experience. Adverse changes to WMC’s assumptions supporting the reserve may result in an increase to these reserves,” GE said.
The company said it estimates the range of possible loss to be between $0 and as much as $500 million above its already booked reserves.
“With respect to the FIRREA investigation, this inability to develop a meaningful estimate of any additional loss beyond the amount of our current reserve reflects, among other factors, the wide variety and broad range of penalties and other sanctions incurred by various financial institutions in proceedings and settlements involving claims made under FIRREA by the DOJ, and the possibility WMC will file for bankruptcy in the event of a finding of liability in the TMI case,” GE said.
“It is possible, however, that the ultimate liability of GE Capital and/or WMC could be higher than our current reserve if a negotiated settlement of the FIRREA investigation cannot be reached at a level commensurate with the reserve, or if we face adverse litigation outcomes if a negotiated settlement cannot be reached,” the company added.