We have published several articles in the last couple of years about the fraudulent conduct surrounding mortgage-backed securities (MBS). The scandal has resulted in billions of dollars in settlement payments to a wide array of state and federal regulators, but there was also a multidistrict litigation (MDL) in the United States District Court for the Central District of California. The most recent settlement out of the MDL involved National Integrity Life Insurance Company’s purchase of $447 million in MBS from Bank of America’s mortgage lending arm – Countrywide Financial Corporation. While the amount of this particular settlement was not disclosed, other recent settlements have been made public.
For example, Bank of America settled with the U.S. Department of Justice (DOJ) on Aug. 21, 2014, for nearly $17 billion. That settlement is the largest related to the 2008 financial crisis and encompasses investigations by other agencies such as the Securities and Exchange Commission (SEC) for the same acts. In the deal, Bank of America will pay a total of $9.65 billion in cash and the other $7.0 billion will be in consumer relief. The cash portion consists of a $5.02 billion civil monetary penalty and $4.63 billion in compensatory remediation payments. The $7 billion for consumer relief will come in the form of mortgage principal and monthly payment reductions, and community improvements like funds to take over and tear down derelict housing and assistance for building or refurbishing affordable rental properties.
Bank of America, however, is paying much more to consumers than the other major banks involved in MBS investigations. Even when combined, those banks, J.P. Morgan Chase & Co. and Citigroup Inc., paid less to consumers than this deal requires of Bank of America. Another positive difference between the settlements relates to how that consumer relief is calculated. Through the settlement, Bank of America, like Citigroup, is incentivized to reduce mortgage principals. Unlike Citigroup, however, Bank of America will receive a credit toward that $7 billion requirement of $1.75 for every $1.00 it forgives for mortgages insured by the Federal Housing Administration (FHA); Citigroup was not incentivized to reduce FHA loans.
Additionally, in order to receive credit, Citigroup had to reduce a loan balance enough so that the homeowner did not owe more than the home was worth – the homeowner would to end up with no equity, but would no longer be “under water.” Bank of America has to take it a step further and reduce the mortgage amounts to no more than 75 percent of the home’s value. That means that consumers affected by the settlement will actually gain equity.
Some complain that those who were more directly injured by MBS lending, homeowners, will not be fairly compensated by the deal. The bulk of the settlement goes to the government. While the deal will certainly benefit homeowners, more so than any of the previous MBS settlements, analysts claim Bank of America will not really feel the loss of that $7 billion in consumer relief. Most of that comes in the form of reduced principals for underwater mortgages and Bank of America may have already written off some of those “troubled mortgages” years ago. Additionally, Bank of America may have already sold those troubled mortgages to investment firms, which will provide some shielding to the bank.
So, while the deal is not perfect, it is a step in the right direction and provides more relief than any earlier settlement. The consumer relief is expected to help tens of thousands of homeowners across the country, though Bank of America says the program will not be up and running until well into the fourth quarter. Regardless of the impact felt by Bank of America, the deal could result in the bank forgiving billions of dollars in mortgage principal, and that is a benefit nobody can complain about. If you need more information on this subject, contact Rebecca Gilliland, a lawyer in our firm’s Consumer Fraud Section, at 800-898-2034 or by email at Rebecca.Gilliland@beasleyallen.com.
Sources: Law360, New York Times, and Wall Street Journal
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