What has the institution agreed to do, and what do these steps mean for those who have something at stake?
Bank of America took a huge step today towards resolving the legal challenges its mortgage business faces. It has agreed to pay $14 billion to put to rest claims by a number of major investors that it didn't buy back souring mortgage bonds when it should have. The bonds were sold by Countrywide, which the bank purchased in 2008. The implications of this settlement are complicated, as it actually has little to do with some other issues it faces over its allegedly poor foreclosure procedures. So let's sort out what the bank has agreed to do and what those steps means for different parties with something at stake.
Where Is $14 Billion Going?
The steps BoA will take have a couple of different dimensions. Money is being set aside for a few different groups for a few different purposes.
Money for Investors
The biggest issue the settlement resolves is the bank's put-back problem. Last October, several major investors demanded that BoA repurchase $47 billion in mortgages. They claimed that the bank failed to follow the representations and warranties on mortgage bond deals that Countrywide sold. They also were angry that the bank was processing foreclosures too slowly and with little regard for their best interest. This settlement resolves that request.
Money for Fannie and Freddie
But it does more than that. It also sets aside $5.5 billion to cover estimated coming put-back requests from Fannie Mae and Freddie Mac for mortgages that fail to adhere to the standards set by the firms at the time of purchase or guarantee. This is in addition to $3 billion the bank agreed to provide Fannie and Freddie last January. According to the bank's press release, it should now be done paying off Fannie and Freddie for its rep and warranty disputes related to first mortgages.
Money for Servicing
Finally, another $400 million will be spent to improve the loan servicing side of its mortgage business. A part of the settlement with investors called for better servicing procedures. This money will be used in an effort to do a better job resolving non-performing mortgages.
No Money Set Aside for Past or Present Homeowners
Who doesn't get any of the $14 billion? The mortgage borrowers who might have been foreclosed on by BoA through flawed procedures won't be provided damages from today's settlement. It also doesn't provide any direct benefit to homeowners currently facing foreclosure, though they could reap some indirect benefit (explained below).
What It Means for Investors
This is a settlement, which implies that neither side is getting exactly what it wants. Obviously, BoA would have preferred to pay nothing, while investors wanted the bank to buyback at least $47 billion in mortgage exposure. BoA ultimately must have concluded that it was better off paying $8.5 billion to these investors than buying back those mortgages or fighting in court.
To be sure, $8.5 billion is a lot of money, but according to the BoA press release, it covers 525 mortgage bond deals initially sold for $424 billion. In that context, the settlement amounts to just 2% of the original balance of those bonds sold. That's not a lot, but the big investors must be satisfied that it's enough to cover the harm BoA's alleged failure to adhere to its reps and warranties. It should be noted, however, that any additional losses that result on those mortgage bonds in excess of the $8.5 billion will be up to the investors to endure.
The press release appears to imply that this settlement is class-action in nature, as it covers BoA's exposure to this gigantic portfolio of mortgage bonds, originally created by Countrywide. So major investors like Blackrock, PIMCO, The Federal Reserve Bank of New York, Invesco, Met Life, Teachers, and Goldman Sachs Asset Management are covered. But smaller investors should be as well. Presumably, investors will get some amount in proportion to the bonds they own.
What It Means for Other Mortgage Lenders
Ultimately, this settlement may serve as a blueprint for future investor settlements with other lenders that may have failed to follow reps and warranties related to mortgage bonds. But this case could be somewhat unique to BoA. When the demand first surfaced, other banks were not named -- just BoA, due to its acquisition of Countrywide. Other big banks have been accused of similar misdeeds, however. If other alleged rep and warranty breaches just as serious are identified, then the precedent set here might matter.
What It Means for Struggling Homeowners
This case has only minor implications for struggling homeowners with Countrywide or Bank of America-originated loans. It shouldn't be confused with the broader foreclosuregate mess, over which state attorneys general are suing the big banks. That still has to be resolved and is not unique to BoA.
But the improved servicing procedures, thanks to that $400 billion capital injection, could help. We'll likely see BoA ramp up its servicing staff and systems to process foreclosures faster and with better attention to detail. While the press release is unclear on how the servicing changes will affect the modification versus foreclosure question, if nothing else you might expect the bank to be looking out for the best interest of its mortgage bond investors going forward. That could translate into more mortgage modifications. Some investors have complained that servicers haven't been more aggressively modifying mortgages when it makes economic sense to do so.
What It Means for Bank of America
This closes a chapter, but not the book, on BoA's mortgage-related problems. The put-back fiasco is now behind it, but other issues persist. As mentioned, it still faces lawsuits over allegedly failing to process foreclosures properly. Of course, it also faces more mortgages losses on its own mortgage portfolio as the housing market continues to struggle and foreclosures remain high.
But so far, the market appears to be cheering the news of this settlement. As of 11:15am, BoA's stock was up nearly 3.5%. When a bank states that it's charging-off $14 billion dollars and its stock rises, you know that the certainty the action brings means must mean a lot to its investors. It certainly could have been worse.
The Countrywide acquisition came with a lot of baggage, which BoA likely expected when it agreed to buy the company. However, it might not have anticipated just how much trouble would ultimately result, between this put-back fiasco and foreclosuregate. Once all of these issues are behind BoA, however, the acquisition will eventually begin to pay off. Countrywide had an unparalleled mortgage origination and distribution platform. So when the housing market returns and the mortgage business becomes profitable again, BoA will be well-positioned to cash-in.
Image Credit: REUTERS/Lucas Jackson