Bank of America Corp.’s plan to sell the insurance unit it acquired with Countrywide Financial Corp. may result in it liquidating properties faster after homeowners stop paying on debt underlying mortgage bonds, according to Amherst Securities Group analyst Laurie Goodman.
Loans underlying Countrywide’s securities without government-backed guarantees have been slower to liquidate than those managed by other servicers, according to analysts at JPMorgan Chase & Co., Barclays Plc and Amherst, an Austin, Texas-based broker of securitized debt.
The biggest reason stems from Charlotte, North Carolina- based Bank of America, as the servicer, being able to install its Balboa Insurance unit’s home coverage after borrowers turn delinquent, Goodman said in a telephone interview. It continues to fund policies until a property sale, boosting its revenue while potentially worsening investor losses, she said.
“It means they’re not in any hurry to liquidate because they’re getting the above-market rates on their insurance,” said Goodman, who was inducted into the Fixed Income Analysts Society’s Hall of Fame last year. Without the conflict, there will be “a considerable difference” in Bank of America’s practices.
Slower liquidations typically hurt senior-ranked classes of mortgage bonds by boosting the size of losses per soured loan and delaying the return of their principal, while helping junior slices by extending their payments.
Chief Executive Officer Brian T. Moynihan disclosed his desire to sell Balboa on a July 16 earnings call “because it’s not a core activity of making mortgages and we’re continuing to fine-tune the franchise.” He also said its liquidations would be “elevated,” partly because it has started ending efforts to help certain borrowers with debt modifications.
A sale would follow a settlement last month in which the bank agreed to pay $108 million over Federal Trade Commission claims that Countrywide overcharged homeowners for “default- related services,” such as inspections and lawn mowing. Its units often marked up what vendors charged for the work by 100 percent or more, the FTC said.
The agency’s complaint and agreement with the bank didn’t mention so-called forced-placed homeowners insurance purchased on behalf of borrowers to protect loan collateral after traditional coverage lapses for nonpayment. The agreement barred it from charging more than the “market rate” for default- related services.
Bank of America “does not have a strategy of delaying sales of REO properties,” Rick Simon, a spokesman, said in an e-mail, using the abbreviation for real-estate owned, meaning taken by a lender.
“The vast majority of REO properties serviced by Bank of America are owned by third-party mortgage investors,” Simon said. “Within their guidelines and delegation of authority, we usually have an obligation to prepare and market these properties expediently, in order to satisfy as much of the unpaid debt as possible and minimize additional costs associated with keeping the property.”
The bank, which oversees more than $2.1 trillion, became the largest U.S. servicer by buying Countrywide in 2008 amid the worst housing collapse since the 1930s, according to newsletter National Mortgage News.
In a May report, Barclays analysts described Countrywide’s so-called non-agency mortgage securities as having “abysmally low liquidation rates.”
During each month from the 16th through 29th month after borrowers fall delinquent, for instance, Countrywide has liquidated less than 2 percent of loans from states other than California, according to data shown by Goodman during a July 15 industry conference in New York.
Other servicers liquidated more than 2 percent of such loans starting in the 16th month, a figure that climbs to more than 3 percent by the 29th, the data derived from bond reports show. Similar disparities exist over different time periods and for California loans.
While this year Countrywide began selling homes faster after seizing them than average after lagging from 2007, it remains slower in terms of the time between delinquencies and foreclosures, and between foreclosures and REO, according to separate data provided by Amherst.
About 3 percent of Countrywide-serviced loans at least 90 days late were put into foreclosure or turned into seized property in April, compared with more than 10 percent at San Francisco-based Wells Fargo & Co., according to a JPMorgan report last month that said its “sluggish liquidation process is by now familiar to non-agency MBS investors.”
Role of Servicers
After borrowers stop paying, servicers for non-agency securities advance funds to cover missed payments, and also lay out cash for items including insurance, taxes, maintenance and lawyers. Servicers recoup the money out of the proceeds from sales of homes after foreclosures or in so-called short sales.
Countrywide’s slow timelines probably most reflect efforts to evaluate borrowers for a slew of programs meant to avert foreclosures, John Sim, a New York-based JPMorgan analyst, said.
They include a federal program and changes the bank agreed to in settling state fraud charges, as well as its own initiatives turned to only after homeowners can’t qualify for other plans, he said in a telephone interview.
“They’ve been trying to appease the government,” by keeping borrowers in homes, Sim said. “I just think that’s got to be the bigger catalyst: They just have so many different checks and balances related to the modification programs that they have to go through.”