BofA will Broaden Principal Reductions, Feds will Reduce Penalties


The Wall Street Journal reported this morning that Bank of
American (BOA) has struck a side deal with the government that would cut
penalties assessed against it in return for making deeper cuts to the mortgages
of distressed borrowers.

The recent $25 billion dollar
settlement between BOA and four other major lenders and the U.S. Justice
Department, federal regulators, and 49 of the states’ attorneys general would
have obligated BOA to pay as much as $850 million in penalties and to cut the
outstanding balance of principal for some borrowers to a maximum of 120 percent
loan-to-value.  Under the new agreement BOA
would cut the outstanding balance down to the market value of the collateral
property and is expected to reduce the average mortgage by about $100,000.  A BOA spokesman said the final value of the agreement
will depend on how many borrowers take up the offer.

February 9 BOA explained to its investors that its obligations under the multi-bank
settlement would total $11.8 billion and include the following:

  • Approximately $7.6 billion in
    borrower assistance, including targeted principal reduction.
  • Approximately $1.0 billion in
    refinancing assistance to customers in the participating states.
  • Approximately $2.25 billion in
    direct payments to state and federal governments and in borrower
    restitution, of which $1.9 billion would be an upfront cash payment and
    the remaining $350 million, would be paid only if Bank of America failed
    to meet certain principal reduction thresholds over a three-year period.
  • Up to $1.0 billion in payments
    to settle FHA claims, of which $500 million would be an upfront cash
    payment, and the remaining $500 million would be paid only if Bank of
    America fails to meet certain principal forgiveness levels over a
    three-year period.

The new agreement does not apply to
any of the other four banks involved in the original settlement.  It would allow BOA to avoid paying $350
million in penalties and the back half of the $1 billion FHA claim referenced
above.  If, as it appears, the $350
million is the portion of the $2.25 billion which is also structured as a
back-end payment it would seem that the bank is being proactive in concluding
remaining details of the settlement.  Many
of the write-downs will be made on loans originated by Countrywide Financial
Corp., which Bank of America acquired in 2008, and then packaged into
securities. BOA will also reduce balances on loans it owns.

The Journal said
that the new arrangement is likely to generate criticism from investors who own
the securities backed by the mortgages that would be reduced and fund managers
who feel it is unfair for banks which were servicing loans for investors to use
those loans to settle problems they themselves caused  It quoted one fund director who would not
speak directly about the agreement as saying, “To ask investors to pay for
banks’ fines in any form seems inappropriate and incorrect-we have very serious
issues with that.”

An Obama administration official
however said that principal reductions will be done only when there is a
benefit to investors; that is the principal reduction would cost less than a
foreclosure, and the reduction would be done in compliance with investor

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