On August 21, it was announced that Bank of America (BofA) agreed to a record settlement with the Justice Department and various state governments regarding the sale of toxic mortgage-backed securities. According to the Justice Department, the $16.65 billion settlement represents the largest single-company settlement in U.S. history.
It also represents the third large settlement in less than a year over mortgage-backed securities. JPMorgan Chase settled with the Justice Department late last year for $13 billion, while Citigroup settled for $7 billion in July.
The $7 billion component for consumer relief was the largest single component of the BofA settlement, followed by the $5 billion civil penalty paid to the Justice Department. $1.03 billion went toward FDIC claims and $1.85 billion went to settle fraud claims, including $800 million toward FHA claims, according to HUD.
Just under $1 billion went to settle state claims, with $300 million each to California and New York and the rest shared by Illinois, Delaware, Maryland and Kentucky. The tax relief fund is $490 million, $200 million went to Ginnie Mae, and $140 million went to the SEC.
Each settlement has directed resources toward assisting homeowners, with $4 billion of the JPMorgan Chase settlement and approximately $3 billion of the Citigroup settlement allotted for consumers. With the BofA settlement, $7 billion is to be directed toward consumer relief purposes – and greater pains have been taken to direct the funds toward minority and low-income homeowners who need it the most. Among the examples:
- The agreement increased the incentive to reduce balances on FHA-backed loans through allowing BofA to receive $1.75 in credit against the total consumer relief requirement for every $1 forgiven.
- Funds are allocated to develop low-income rental housing and improve existing units, and to refurbish or demolish abandoned homes to improve neighborhoods and preserve the surrounding property values.
- Up to $490 million has been allocated to cover taxes that arise from forgiveness of mortgage debt (since it is classified as taxable income to homeowners). Congress could make this moot by retroactively restoring the Mortgage Forgiveness Debt Relief Act, but they show no signs of doing this so far.
- To qualify for relief under this settlement, homeowners cannot owe more than 75% of the current value of their property after a loan is modified. This prevents cosmetic levels of relief, and is one step past the Citibank ruling requiring that the homeowner must not owe more than the full value.
Many homeowners will also benefit from the lowering of interest rates on existing mortgages – according to Associate Attorney General Tony West, the interest rates for some mortgages may be lowered down to 2%.
It appears that BofA will weather the storm fairly well. Once the settlement was announced, BofA released an expectation of a pre-tax earnings reduction of $5.3 billion in the third quarter. Stockholders approved, as early trading sent the stock up 1.7%.
As with the previous settlements, some are arguing that the settlement was not punitive enough, and that due to tax writeoffs and other machinations, the costs are not proportionately damaging to BofA to prevent similar behavior in the future.
However, there is one difference in this case – while BofA is not admitting guilt, the agreement does not protect BofA officials from future criminal prosecution.
Settlements rarely make everyone happy, and time will tell whether the punitive aspect was sufficient. To date, not one financial executive has served a day of jail time for any misdeeds associated with the toxic mortgage crisis that helped fuel the Great Recession.
Arguments are likely to continue on whether the punitive component of the Bank of America settlement was sufficient to prevent future occurrences of mortgage-backed securities fraud. However, almost everyone agrees that the Justice Department is increasing the help available to distressed homeowners and attempting to direct this help to those who need it most, which is clearly good news.
Bank of America will be searching through their portfolios of mortgages for homeowners that qualify for relief and will be contacting them later this year – they expect the relief program to be fully operational sometime in the fourth quarter. If you believe that you qualify for assistance, you can call 877-488-7814, which was a number established to handle questions about previous settlements with the government.
Let’s hope that these settlements serve as a collective lesson learned, and that we do not have to use them as a reference point for some future mortgage-based securities legal action many years down the road. Let’s also hope that large numbers of consumers actually benefit from the relief promised in this settlement. Time will tell.