Bank of America Corp. can get credit toward its record $16.7 billion settlement of U.S. mortgage probes without doing a thing.
The lender, which jumped the most in 15 months in New York trading yesterday after agreeing to resolve government claims, pledged $7 billion in consumer relief in the deal. Some of that may be satisfied as borrowers get mortgage help from firms that bought their loans or servicing rights from the bank, according to terms on the Justice Department’s website. That can even apply to assets the bank already sold.
Past U.S. settlements with big banks were criticized by investors and lawmakers after the companies got credit for borrower relief that might have occurred anyway or left other firms bearing the cost. Bank of America’s shares rose 4.1 percent after the government announced the settlement, ending what the firm has called its last big legal bout from the housing bust.
“It’s not just that they’re getting credit for stuff they would do otherwise, this is getting credit for something somebody else is doing,” Kevin Stein, associate director of the California Reinvestment Coalition, which advocates for financial services in low-income communities, said of the settlement. “We’re happy if it’s more likely homeowners get a modification, but it’s not clear how much of that is more than what would’ve occurred anyway.”
Bank of America, the second-largest U.S. lender by assets, sold $2.1 billion of non-performing mortgages in the second quarter and has been seeking to dispose of about $3 billion in soured loans this month. It also has auctioned off servicing rights, including a 2013 sale of contracts on $215 billion of loans to Nationstar Mortgage Holdings Inc.
Recent sale agreements probably include provisions to help Bank of America track and report subsequent consumer relief to the settlement’s monitor, a step needed to claim credit, said Laurie Goodman, a former Wall Street mortgage-bond analyst who’s now director of the Housing Finance Policy Center at the Urban Institute in Washington.
“I’m sure that anything sold in the last six months has contemplated this and provided for it,” she said of the bank’s need to document modifications.
Allowing Bank of America credit for changes to loans it no longer controls will motivate the firm to see that those borrowers aren’t forgotten, according to the Justice Department.
“This incentive was included to address the problem homeowners all too often face when banks sell loans to a new servicer during the modification process and the writedown is never completed,” said Ellen Canale, a spokeswoman for the department. “We hope to ensure that consumers continue to benefit from the relief regardless of who owns the loan or where the homeowner is in the modification process.”
Bank of America can get credit “as long as the modification is completed consistent with the terms of the settlement and it meets the monitor’s approval,” said Dan Frahm, a spokesman for the Charlotte, North Carolina-based company. “This is to encourage other servicers effectively to expand the reach of the efforts, supporting modifications consistent with the terms set forth in the agreement.”
In November, JPMorgan Chase & Co. (JPM)’s $13 billion then-record settlement with the government included $4 billion of consumer relief. While it also allowed for similar credit, modifications must be offered within a year after loans or servicing rights are sold. Alterations to former Bank of America loans must be done between the start of last month and Aug. 31, 2018, the same period for the changes it makes itself to debt it owns or oversees for mortgage-bond investors.
The Association of Mortgage Investors, whose members include DoubleLine Capital LP and AllianceBernstein Holding LP, asked U.S. Attorney General Eric Holder in a letter in June to stop the practice of counting modifications on loans banks only oversee, saying it harmed “innocent parties whose money we manage.”
Bank of America may further blunt the settlement’s financial blow by cutting its tax bill. Of the cash portion of the accord, $4.63 billion earmarked for remediation is probably tax-deductible, a person with knowledge of the terms said.
It makes financial sense for distressed-loan buyers to modify debts for borrowers, Gary Beasley, co-chief executive officer of Starwood Waypoint Residential Trust (SWAY), said in an Aug. 14 interview at Bloomberg News headquarters in New York. His real estate investment trust also converts some bad loans into rentals after foreclosures.
“We’ll always try to modify,” Beasley said, because doing so can still be profitable. “Why kick someone out of a home who can pay you and give you a high-teens levered return?”