Ten US banks announced two huge settlements worth a total of $18.5bn on Monday, in the latest moves to clear up claims relating to the mortgage crisis that foreshadowed the meltdown of the American economy.
Bank of America agreed to pay $10bn to Fannie Mae, the national mortgage guarantor, to settle claims that Bank of America sold Fannie Mae bad loans for 10 years, ending in 2008. As part of the agreement, Bank of America will also buy back $6.75bn of bad mortgage loans. All the money will go straight to Fannie Mae, which will then be forced to hand it straight to the US government. The US Treasury, exasperated with continued losses at Fannie Mae and Freddie Mac, long ago barred either of the mortgage giants from keeping any profits.
In another, unrelated settlement 10 banks and financial institutions – including Bank of America, JP Morgan Chase and Wells Fargo – agreed to settle claims of foreclosure abuses for $8.5bn.
About $3.3bn of that is intended to go partly to homeowners who suffered from the abuses in 2009 and 2010, ranging from bad loan modifications to lost or damaged paperwork. That settlement, which Bank of America reached with the Federal Reserve and banking regulator The Office of the Comptroller of the Currency, also gives $5.2bn for loan modifications, or friendlier changes in loan terms to help homeowners pay the money back.
These settlements are good for banks, who are now able to put part of the mortgage mess behind them, and good for regulators, who can claim a victory. They are less good for homeowners, who often get caught up in red tape when trying to get mortgage help.
Bank of America's CEO Brian Moynihan said the agreements were "a significant step" in resolving the institution's issues that related from its purchase of Countrywide in July 2008, just before the financial crisis. Countrywide was one of the biggest mortgage lenders in the US, but was known for approving high-risk loans.
Bradley Lerman, Fannie Mae executive vice-president and general counsel, said in a statement: "Fannie Mae has diligently pursued repurchases on loans that did not meet our standards at the time of origination, and we are pleased to have reached an appropriate agreement to collect on these repurchase requests,"
BoA said it would pay for the Fannie Mae settlement in part from existing reserves. Bank of America also said it would record a $2.7bn hit to its fourth quarter earnings for 2012.
Bank of America fell 8¢ to $12.01 Monday, after opening slightly up.
The Bank of America settlement represents a good deal for the bank, despite the negative effect on its income on its income, as it closes the door on an estimated $300bn hit from mortgages it sold to Fannie Mae.
The settlement is is also an important acknowledgement, in financial terms, that Bank of America is putting the alleged mortgage abuses at Countrywide behind it.
For regulators, the deals also come at a good time. US housing regulators are likely to get new leaders soon, and this allows them to start fresh.
But the two settlements are less good news for homeowners. The deal between Bank of America and Fannie Mae contains no mechanism by which the money would reach the homeowners who signed bad loans. In the second settlement – between 10 banks, the Federal Reserve and the OCC – homeowners who suffered mortgage abuses should theoretically be able to get $125,000 each. If recent history is any indication, however, it will be hard for them to see much of that money.
Advocates say the regulators let the banks off too lightly in the foreclosure deal. "This was supposed to be about compensating homeowners for the harm they suffered," said Diane Thompson, a lawyer with the National Consumer Law Center. The payout guidelines already allowed wronged homeowners less compensation than the losses they suffered, she said.
The settlements highlight what Peter Tchir, founder of TF Market Advisors, described as the "black hole" of the mortgage crisis."It's been such an effort to put this past us, at the expense of the underlying economy or people who are hurt directly," said Tchir.
Earlier this year, the nation's major banks signed a $25bn mortgage settlement that was designed to help consumers. Part of that money was designed to go to various US states, which were supposed to use the settlement money for housing programs and other relief. Instead, some of the money was diverted. As ProPublica reported: "Of the $2.5bn going to states, just over a billion dollars has been pledged for housing-related programs, while a roughly equal amount has been diverted to plug budget holes or fund programs unrelated to the foreclosure crisis."
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