http://dealbook.nytimes.com/2014/08/21/bank-of-america-reaches-16-65-billion-mortgage-settlement/

August 21, 2014

Bank of America's $16 Billion Mortgage Settlement Less Painful Than It Looks

By PETER EAVIS and MICHAEL CORKERY

The Justice Department said on Thursday that it had so far recovered nearly $37 billion from big banks for their role in selling shoddy mortgages before the financial crisis.

Such a large number -- intended to deter misdeeds in the future -- suggests that Wall Street is being made to pay for its role in stoking the subprime debacle. Yet the financial pain inflicted by the settlements may not be as great in the end.

Take the latest, and largest, mortgage settlement. Bank of America has agreed to a $16.65 billion deal [1] with federal and state authorities. The actual financial burden for Bank of America, however, may not exceed $12 billion -- certainly a large amount, but one significantly less than the number the government trumpets.

At issue is how much of the cost of the $7 billion in "soft dollars," or help for borrowers, the bank will bear under the settlement. Some of the relief the bank will provide involves cutting the principal of a loan to make it easier for the borrower to pay. The dollar amount of that reduction gets credited toward what it needs to fulfill the settlement. But Bank of America wrote down many of its troubled mortgages years ago. And investment firms, not Bank of America, may now own some of the loans that get written down, potentially shielding the bank from a financial hit.

"The real financial cost to the bank could be considerably lower," said Laurie Goodman, a specialist in housing at the Urban Institute. "This is helping consumers, but it may not be costing the bank."

The actual pain to the bank could also be significantly reduced by tax deductions. Tax analysts, for instance, estimate that Bank of America could derive $1.6 billion of tax savings on the $4.63 billion of payments to the states and some federal agencies under the settlement. Shares of Bank of America jumped 4 percent on Thursday, suggesting investors believe that the bank could take the settlement in stride.

"The American public is expecting the Justice Department to hold the banks accountable for its misdeeds in the mortgage meltdown," said Phineas Baxandall, an analyst with the U.S. Public Interest Research Group, a consumer advocacy organization. "But these tax write-offs shift the burden back onto taxpayers and send the wrong message by treating parts of the settlement as an ordinary business expense."

Still, government authorities, in announcing the settlement on Thursday, put emphasis on the aid that will come to borrowers. Attorney General Eric H. Holder Jr. led a news conference that was attended by such a large group of investigators from around the country that there was masking tape on the stage to show them where to stand.

"This historic resolution -- the largest such settlement on record -- goes far beyond 'the cost of doing business,' " Mr. Holder said.

The Justice Department had already forged huge mortgage deals with JPMorgan Chase and Citigroup, but in certain ways, the Bank of America accord is shaping up into the showpiece for the Obama administration. Some consumer advocates said that while the deal was flawed in many ways, it provided more relief than the other settlements.

"It is better than previous settlements because it offers more principal reductions, more money for blighted areas and more money for new mortgages to low- and moderate-income home buyers," said Bruce Marks, founder of the Neighborhood Assistance Corporation of America.

And in contrast to the other deals, law enforcement authorities are weighing whether to sue bank executives, including Angelo Mozilo, the co-founder and former chief executive of Countrywide Financial, the mortgage giant that Bank of America bought in 2008.

The consumer relief is expected to help tens of thousands of homeowners across the country. Most notably, the deal could result in Bank of America forgiving billions of dollars in mortgage principal. Unlike the other settlements, a person briefed on the matter said, the Bank of America plan could involve cutting the principal on loans insured by the Federal Housing Administration, a move that will primarily help low- and moderate-income borrowers.

With six years having passed since the depths of the housing crisis, however, many homeowners with Countrywide loans have already lost their homes in foreclosure.

The Justice Department and the state attorneys general who negotiated the settlement were creative with their relief measures. In New York State, for example, Bank of America has agreed to donate hundreds of foreclosed properties to land banks and community groups, while chipping in money to renovate each property.

Such measures are also popular with politicians. Bank of America agreed to finance affordable rental housing, a top priority for city and state leaders, particularly Democrats, like Mayor Bill de Blasio of New York, who called the deal "historic."

Bank of America has also agreed to pay as much as $490 million to homeowners who face larger tax bills after their mortgages are modified. Such debt relief may be taxable for the homeowner.

Nonetheless, the punishment for the banks may be considerably lighter than it looks. The consumer relief is where the mismatch between headline settlement figures and actual costs occurs.

As part of the deals, banks can modify loans that they still hold in order to help struggling borrowers. But such modifications may not require any new financial sacrifice on the part of the bank. Indeed, on Thursday, analysts with Moody's Investors Service wrote, "most of the cost of homeowner relief is already incorporated into existing loan-loss reserves."

The mortgage settlements may prompt protests from the large investment firms that bought the bonds that are backed with faulty mortgages.

Many loans owned by the investors through such bonds could get modified under the settlements, causing a hit for the investors but not the banks. The investors note that the government promotes the settlements as punishment for dumping faulty loans on investors, but it devises deals that saddle investors with some of the costs. Further chafing the investors is the potential credit the banks get for modifications to the investors' loans to meet the dollar requirements of the settlements.

"I don't want the banks getting credit for taking my money," said Vincent A. Fiorillo of DoubleLine Capital, an investment firm that holds mortgage-backed securities. "It's very frustrating."

Citigroup expects to meet its consumer relief requirements by adjusting mortgages it owns, according to Mark Costiglio, a spokesman for the bank. Dan Frahm, a spokesman for Bank of America, said it planned for the "majority" of its modifications to be on loans that it owns. JPMorgan declined to comment on where the breakdown of its modifications might occur.

Some housing analysts say that the settlements need to include a significant amount of investors' loans, so that a meaningful number of borrowers get relief. In response, the investors say that they support modifications and ask why the big banks have had to be prompted by the settlements to do them.

"If you feel you can do a modification on a loan that belongs to an investor, then by all means do it," Mr. Fiorillo said. "But don't get credit for it."

Matt Apuzzo contributed reporting.

[1] http://dealbook.nytimes.com/2014/08/21/bank-of-america-papers-show-conflict-and-trickery-in-mortgages/