BofA will Broaden Principal Reductions, Feds will Reduce Penalties

by devteam March 9th, 2012 | Share

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"

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

    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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  • About the Author


    Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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