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Wells Fargo Remains a Buy Despite Lawsuits

NEW YORK ( TheStreet) -- " Wells Fargo (WFC - Get Report) Is Making Shareholders Rich" is the title of an article I wrote on July 15.

Wells Fargo originally prevailed in federal court against against lawsuits claiming the bank acted in bad faith in a federal district court. But the Ninth Circuit Court of Appeals has reversed the decision, ruling that the case can move forward.

Does this litigation setback change my opinion on Wells Fargo? No.

As a result of falling home prices and a growing number of homeowners faced with mortgage payments they could no longer afford, the federal government created a program called the Home Affordable Modification Program (HAMP) as part of the Emergency Economic Stabilization Act of 2008 and American Recovery and Reinvestment Act of 2009.

The desired goal of HAMP was to give banks incentives to lower the payments of borrowers so that the borrowers could continue making payments and avoid foreclosure.

The plaintiffs allege that Wells Fargo acted in bad faith by giving homeowners hope that they would receive approval for a loan modification in order to entice the homeowners to make additional payments that they otherwise wouldn't have made.

The issue is whether the borrowers qualified for the permanent program after the trial period. In a nutshell, the plaintiffs claim they qualified or were told they did, and the bank states they weren't.

It's hard to handicap such cases when you have incomplete information, but it's reasonable to assume litigation costs alone will have a short-term impact on Wells Fargo. The appeals court ruled the plaintiffs may move forward as a class-action suit.

A class action makes it much easier for additional plaintiffs to join. Class actions allow people who don't necessarily have enough at stake to sue on their own, to join as part of the class action and seek compensation. I think this case is fully baked into the cake and doesn't move me from my $48 price target.

In another case, Blue Cross Blue Shield of Minnesota v. Wells Fargo Bank, Wells Fargo prevailed in a federal jury trial. With housing prices rising again, the number of lawsuits should slow down, but these cases will take years to work through.
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