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.