Wall Street Listens for Litigation and Tax Clues in Obama’s Speech

Like last year, Wall Street might not be at the top of President Obama’s agenda in his State of the Union address on Tuesday night. But that doesn’t mean the financial community won’t be listening for certain cues.

The president plans to address immigration reform, the environment and income inequality, among other issues. Banks, on the other hand, might be more concerned with their legal bills, for instance, as the government continues to crack down on firms for sour mortgages they made in the lead-up to the financial crisis.

But the president doesn’t necessarily have to address Wall Street’s problems directly to give clues about what the future holds. Patting regulators on the back for JPMorgan Chase’s landmark $13 billion settlement, for example, could be seen as encouragement for authorities to pursue action against other institutions.

“We’ll all be reading between the lines,” said Brad Hintz, an analyst with Sanford Bernstein. “To me, we’re not the center of attention on this one.”

Wall Street has already been bracing for larger legal bills, which by some calculations could cost banks nearly $50 billion. Firms have been setting aside generous litigation reserves, which were so big at Morgan Stanley, in fact, that they dinged the bank’s fourth-quarter earnings.

Some observers, however, are looking for signs that Mr. Obama may want to ease up on regulations related to mortgages being made now. Or, more specifically, the ones banks are not making.

“One of the most positive things you could see in this speech is having the president address head-on that there is a mortgage credit crunch and that people who should be getting loans can’t get mortgages and can’t move into homes,” said Jaret Seiberg, an analyst with Guggenheim Securities. “It’s not that the president’s words are going to magically widen the credit box, but it would be a recognition that this problem is real and it’s hurting consumers and it might influence the regulators to take a half a step back.”

Earlier this month, the Mortgage Bankers Association lowered its forecast for mortgage originations in 2014 by $57 billion to $1.12 trillion for the year, citing declining mortgage application activity and rising interest rates. The group also lowered its expectations for refinance originations to $440 billion in 2014, from $463 billion.

Mr. Seiberg said he was encouraged last week by remarks from Michael A. Stegman, the counselor to the Treasury secretary for housing finance policy, that included concerns about broadening the availability of mortgage credit over the long term. Mr. Seiberg said he hoped that an acknowledgment of the issue by the president on Tuesday night could get the ball rolling on broader changes.

“The hope is that the president influences the regulators and the regulators influence the banks and the banks make credit more available to consumers,” he said.

One issue the president does plan to address, income inequality, could affect Wall Street if Mr. Obama outlines specific plans to change the tax code.

“I’ll be listening for things related to the tax code, but I don’t expect that to be a major focus,” said Byron Wien, the vice chairman of Blackstone Advisory Partners.

In November, the chairman of the Senate Finance Committee released a long-awaited set of proposals to overhaul the tax code for multinational corporations, fueling speculation on what broader tax code changes Congress may want to implement. Financial institutions, eager to clear up the uncertainty around taxes, will be looking for any hints that the president may drop on Tuesday night.

“Our members are mainly concerned about making sure the rules are clear,” said Alison Hawkins, the vice president of communications at the Financial Services Roundtable, a banking and insurance industry trade group. “If tax reform happens any time this year or if the president encourages tax reform this year, we’d see that as a positive sign.”

Big banks were a target of Mr. Obama’s address in 2012, although he didn’t mention Wall Street once during the State of the Union last year.

“And I will not go back to the days when Wall Street was allowed to play by its own set of rules,” Mr. Obama said in 2012. “The new rules we passed restore what should be any financial system’s core purpose: Getting funding to entrepreneurs with the best ideas, and getting loans to responsible families who want to buy a home, or start a business, or send their kids to college.”