Bank of America reaches record $16.65B mortgage settlement

Bank of America’s record $16.65 billion settlement with the U.S. government over toxic mortgage bonds requires the Charlotte bank to help struggling homeowners by modifying mortgages, forgiving principal and making loans to lower-income borrowers.

But it could take four years for all the aid to be parceled out, and not all troubled loans are eligible.

The settlement announced Thursday includes $7 billion in consumer relief that federal authorities said would help hundreds of thousands of Americans still struggling with fallout from the housing meltdown. The deal also calls for the bank to make $9.65 billion in cash payments to the government and six states.

It is the biggest civil settlement between a single company and the government and the latest instance of a major U.S. bank agreeing to pay billions of dollars to settle allegations of wrongdoing that fueled the worst economic crisis since the Great Depression.

In reaching the deal, the bank admitted that it, Countrywide Financial and Merrill Lynch took part in faulty mortgage-backed securities practices. Bank of America bought mortgage lender Countrywide in 2008 and investment bank Merrill Lynch in 2009.

Bank of America also admitted to underwriting government-insured home loans for borrowers who did not qualify for the loans. Many of those borrowers defaulted on mortgages and some lost their homes to foreclosure, the bank acknowledged in a “statement of facts” filed with the case.

“Bank of America has acknowledged that, in the years leading up to the financial crisis that devastated our economy in 2008, it, Merrill Lynch and Countrywide sold billions of dollars of (mortgage bonds) backed by toxic loans whose quality, and level of risk, they knowingly misrepresented to investors and the U.S. government,” U.S. Attorney General Eric Holder said in prepared remarks.

In a statement, Bank of America CEO Brian Moynihan said the accord resolves “significant” remaining legal exposure facing the bank over troubled mortgages. The deal, he said, “is in the best interests of our shareholders and allows us to continue to focus on the future.” Investors on Thursday boosted the bank’s shares more than 4 percent, to $16.16.

The government didn’t accuse any specific executives of wrongdoing, which has been a flash point for critics. The settlement does not release Bank of America or any individuals from potential criminal prosecution, the Justice Department said. It also doesn’t release any individuals from civil charges.

The settlement drew swift criticism Thursday from consumer advocates who said it won’t be enough to compensate victims of the housing crisis. Since 2007, lenders have repossessed more than 4 million properties nationwide and more than 92,000 in North Carolina, according to real estate data firm RealtyTrac.

Neighborhood Assistance Corp. of America said in a statement that, as with past government settlements involving large banks, Bank of America’s settlement “will provide little if any real help to stabilize and increase homeownership.”

NACA criticized the portions of the settlement that will go to the government, rather than homeowners and homebuyers.

“Instead, this money should be specifically allocated to aid communities and homeowners impacted by the abuses committed by Countrywide during the mortgage bubble,” the group said.

Borrowers in all 50 states are eligible to apply for relief, the bank said. But not all troubled borrowers can have their loan balances reduced. Mortgages held by Fannie Mae and Freddie Mac, the government-sponsored mortgage giants, are not eligible for principal reduction, under government policy.

Advocates also criticized a provision giving the bank until August 2018 to provide the consumer relief.

“There should be a tighter rein on this,” said Bruce Marks, chief executive of NACA. “You’re going to see Bank of America trying to push it out faster, but the fact of the matter is it shouldn’t be four years on that.”

Others criticized the settlement for penalizing shareholders for the actions of individuals. Former Wells Fargo CEO Dick Kovacevich, in an interview with CNBC, said the settlement was more about politics than justice.

“This is just simply a political stance and theater that has been going on for five years of bashing financial initiations,” he said. “Neither JPMorgan or its employees or Bank of America or its employees did anything wrong here. They just bought companies that did wrong.”

The government, he said, should be going after “the people who did wrong. Corporations don’t engage in criminal behavior. They don’t take advantage of innocent people. People do. And the reason they’re going after corporations is because they can. And they aren’t going against the individuals because it takes a long time to do so.”

About one-fourth of the settlement amount, or $4.65 billion, is expected to be tax deductible as a business expense, a bank spokesman said. The bank is expected to take the write-off in the third quarter. The bank cannot write off the $5.02 billion in penalties it will pay under the settlement.

The bank said it expects the settlement to lower its third-quarter pre-tax earnings by $5.3 billion, or about 43 cents a share after taxes. In the first half of this year, the bank has set aside $10 billion for legal expenses, some of which was earmarked for the Justice Department accord.

Mortgage quality at issue

Central to prosecutors’ claims is that Bank of America, Countrywide and Merrill Lynch did not disclose to investors key information illustrating the true quality of the home loans being bundled into bonds.

In an internal email, excerpts of which the government released, one Merrill Lynch consultant asked how much time he should be spending reviewing the quality of loans, “if (a Merrill executive) is going to keep them regardless of issues? ... Makes you wonder why we have due diligence performed other than making sure the loan closed.”

In the case of Countrywide, during the run-up to the housing crisis the subprime lender began making more loans that did not meet its lending guidelines. In documents provided to investors, Countrywide generally did not disclose the extent to which securitized mortgages deviated from its guidelines, Bank of America acknowledged.

All told, Bank of America has spent more than $70 billion over financial crisis-era legal issues – more than any other lender.

Crisis-era litigation has weighed on its earnings and stock price, which is far below its peak in 2006, when it traded for more than $50. Analysts say the Justice Department settlement removes a cloud that has dampened the stock’s performance.

“There’s no more negative worry reflected in the stock price, at least related to that very large item,” said Dan Marchon, a bank analyst for Raymond James & Associates.

As with other settlements with big banks, an independent monitor will oversee the bank’s compliance with its consumer relief requirements. Eric Green, a professor at Boston University School of Law, has been named monitor of Bank of America’s settlement.

Multiple probes resolved

The “global” agreement settles a long list of cases with U.S. attorneys in multiple states and federal agencies such as the U.S. Securities and Exchange Commission and the Federal Deposit Insurance Corp.

The states are California, Delaware, Illinois, Kentucky, Maryland and New York, all of which will receive compensatory payments. A spokeswoman said the North Carolina Attorney General’s Office was not a party to the settlement because it does not have securities enforcement authority under state laws.

In a new SEC case resolved Thursday, the agency said Bank of America failed to disclose to its shareholders potential increased costs from rising requests from investors to repurchase soured mortgage loans in 2009.

The bank continues to face litigation stemming from the crisis. For example, the settlement does not resolve the so-called “Hustle” lawsuit the bank has been fighting. That lawsuit centers on a Countrywide program that allegedly fast-tracked approval of mortgages without regard for their quality.

A federal judge in New York ruled last month in the Hustle case that Bank of America should pay $1.27 billion in civil penalties. Bank of America said Thursday it would appeal that ruling.

With the Justice Department case now resolved, analysts are looking to see how Moynihan can grow the bank without the distraction of a major legal issue. Marchon, the Raymond James analyst, said investors will turn their attention to Moynihan’s efforts to cut costs in order to boost profits.

“He needs to deliver,” Marchon said.

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