BofA will Broaden Principal Reductions, Feds will Reduce Penalties
The Wall Street Journal reported this morning that Bank ofrnAmerican (BOA) has struck a side deal with the government that would cutrnpenalties assessed against it in return for making deeper cuts to the mortgagesrnof distressed borrowers.</p
The recent $25 billion dollarrnsettlement between BOA and four other major lenders and the U.S. JusticernDepartment, federal regulators, and 49 of the states’ attorneys general wouldrnhave obligated BOA to pay as much as $850 million in penalties and to cut thernoutstanding balance of principal for some borrowers to a maximum of 120 percentrnloan-to-value. Under the new agreement BOArnwould cut the outstanding balance down to the market value of the collateralrnproperty and is expected to reduce the average mortgage by about $100,000. A BOA spokesman said the final value of the agreementrnwill depend on how many borrowers take up the offer.</p
OnrnFebruary 9 BOA explained to its investors that its obligations under the multi-bankrnsettlement would total $11.8 billion and include the following:</p<ul type="disc"
The new agreement does not apply tornany of the other four banks involved in the original settlement. It would allow BOA to avoid paying $350rnmillion in penalties and the back half of the $1 billion FHA claim referencedrnabove. If, as it appears, the $350rnmillion is the portion of the $2.25 billion which is also structured as arnback-end payment it would seem that the bank is being proactive in concludingrnremaining details of the settlement. Manyrnof the write-downs will be made on loans originated by Countrywide FinancialrnCorp., which Bank of America acquired in 2008, and then packaged intornsecurities. BOA will also reduce balances on loans it owns.</p
The Journal saidrnthat the new arrangement is likely to generate criticism from investors who ownrnthe securities backed by the mortgages that would be reduced and fund managersrnwho feel it is unfair for banks which were servicing loans for investors to usernthose loans to settle problems they themselves caused It quoted one fund director who would notrnspeak directly about the agreement as saying, “To ask investors to pay forrnbanks’ fines in any form seems inappropriate and incorrect-we have very seriousrnissues with that.”</p
An Obama administration officialrnhowever said that principal reductions will be done only when there is arnbenefit to investors; that is the principal reduction would cost less than arnforeclosure, and the reduction would be done in compliance with investorrncontracts.
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