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BoA 'rips off Band Aid' in multi-billion dollar settlement

Mortgage schemes proving costly to buyer of Countrywide


Some mortgage-scandal chickens may finally be coming home to roost, but just how beleaguered homeowners may eventually benefit--if at all--remains to be seen.

A bigger loss than CEO projected

A rumored $8.5 billion settlement with bondholders became reality for Bank of America today, announced by Bloomberg Business with the headline "Moynihan Opts to ‘Rip Off Band-Aid’ From BofA Loan Wound":
Bank of America Corp. is settling for a bigger loss on defective mortgages than Chief Executive Officer Brian T. Moynihan had forecast in January as he seeks to distance the firm from housing bets and reverse a stock decline.

The bank agreed to pay $8.5 billion to resolve claims from bondholders, including BlackRock Inc. and Pacific Investment Management Co. [PIMCO], involving soured mortgages. The Charlotte, North Carolina-based lender said today the bill for settling with private investors may eventually exceed $14 billion, compared with a projection five months ago of zero to an “upper range” of $7 billion to $10 billion.

“We support management’s attempt to rip off the Band-Aid and get the mortgage mess behind them so investors can look forward, but unfortunately there remain many open issues and likely billions more in costs,” David Trone, an analyst at JMP Securities, said today in a note. Moynihan took a “much higher- than-expected hit” to resolve some claims, he said.

$20 billion+, maybe--could blank six months' earnings

All the chickens may not be counted, yet. The $14 billion figure, including reserves for future claims, could rise another $5billion. And that doesn't count the $3 billion BoA committed to during January settlement talks with government-sponsored entities (GSEs) Fannie Mae and Freddie Mac.

According to a CBS report, "the settlement with 22 investors, of which includes Pimco, Metropolitan Life, BlackRock, and the Federal Reserve Bank of New York, is subject to court approval and covers 530 trusts with original principal balance of $424 billion.

"The settlement would wipe out all of the company's earnings in the first half of this year, and it could also provide a template for deals with other big banks that faces similar claims, reports The New York Times."

Was Countrywide purchase a bargain?

Oddly enough, the rotten loans trace to BoA's 2008 acquisition of Countrywide, a leader in creating the mortgage-industry wreck that wadded up the U.S. economy to its bleakest condition since the Great Depression. At the time, BoA crowed about scooping up Countrywide at a bargain price.

Subsequently, in October 2010, Countrywide's mastermind, Angelo Mozilo, received a record penalty for his part in the scheme--and by settling the case with the SEC probably dodged a criminal trial. Since then, of course, the U.S. housing sector has double-dipped to a point worse than in the Great Depression.

Improved payment collections part of deal

From The New York Times' account of the BoA settlement:
The securities affected by the deal come from Countrywide Financial, the subprime mortgage lender whose practices have come to symbolize the excesses of the housing boom. Bank of America bought Countrywide in 2008.

The settlement goes beyond just the securities owned by these investors, however.

It covers nearly all of $424 billion in mortgages that Countrywide issued, which were then packaged into mortgage bonds. That means that a broader group of investors will share in the proceeds, according to the people who were briefed on the proposed settlement, but were not allowed to speak publicly.

In addition, the deal will require Bank of America to improve its payment collection process by hiring specialists to focus on high-risk loans, and do a better job of tracking whether the bank is adhering to its own internal loan-servicing standards.

Stock price rose on news

What's really odd--and probably galling to workaday Americans, specially those who are still struggling with the aftershocks of the Great Recession--is that the market responded favorably to the news of the BoA settlement. Apparently, the thinking is, "OK, good, now they've got that mess behind them."

Other majors may shell out billions, too

The Times' piece also says JPMorgan Chase, Citigroup and Wells Fargo will at some point join BoA in shelling out billions for their roles the mortgage schemes, estimating that the four mega-banks "are likely to absorb roughly 40 percent of the industry’s mortgage-related losses." According to the article, "Chase could expect losses reaching as much as $11.2 billion. Wells Fargo has potential losses of up to $5.2 billion, while Citigroup could see losses top $3.3 billion."

Still outstanding is the settlement among the states' attorneys general, which is estimated to be about $30 billion in fines and penalties for the largest mortgage lenders.

What's the bottom line for consumers?

Our question is two-fold:

  1. Where are the criminal charges?

  2. How much--if any--of all these penalties and fines can be applied to accounts for folks who are still struggling to keep their homes?

Sad to say, I'm afraid we all know the answer. In short, if you're already considering filing for bankruptcy protection, it's unlikely that any changes resulting from these lawsuits will take place soon enough to help.

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