This one offers a bit of vindication. I cannot tell you how much grief I got from “official sources” over the clear reality that banks would be able to pay off their penalties in the foreclosure fraud settlement with investor money. HUD Secretary Shaun Donovan flat-out said it, and then had to backtrack and obfuscate. But it was clearly set up by the terms of the settlement. Banks would get credit under the settlement for modifying loans in private label mortgage backed securities, which means the investors take the hit.
This became more clear in Bank of America’s side deal, where they would reduce their penalty through modifying loans they don’t own:
The expanded program could allow Bank of America to avoid paying $350 million in penalties tied to the foreclosure settlement and half of a separate $1 billion penalty related to a settlement of false claims filed on loans backed by the Federal Housing Administration, if the bank meets certain targets. Many of the write-downs will be made on loans originated by Countrywide Financial Corp., which Bank of America acquired in 2008, and then packaged into securities. BofA will also reduce balances on loans it owns [...]
Some fund managers feel it is unfair for banks, which serviced mortgages on behalf of investors, to use those same loans to meet their obligations under the settlement. “The fact that a servicer has done a poor job has already impacted borrowers and our investors,” said BlackRock Managing Director Randy Robertson, who declined to speak specifically about the Bank of America agreement. “To ask investors to pay for banks’ fines in any form seems inappropriate and incorrect—we have very serious issues with that.”
BofA made a settlement deal with its own investors for $8.5 billion (one that’s still tied up in court), that they claim makes those loans eligible for write-downs without even having to get investor consent on a case-by-case basis. It’s probable that these write-offs could be beneficial to the investor, or NPV-positive, to use the technical term. But they’re still paying for BofA’s misconduct.
BofA started this process back in May by mailing letters to people with loans that they “owned or serviced.” In other words, they would reduce balances on loans they didn’t own, and get credit under the settlement. Sure enough, as American Banker reports today, writing about BofA’s compliance with the settlement:
In a surprising revelation, the Charlotte, N.C., lender also said that more than half of the nearly $5 billion in principal reductions will be paid for by investors, not the bank itself. That matters little to delinquent borrowers who saw their monthly payments reduced, but it is sure to anger investors who have argued that they should not have to be punished for banks’ mistakes.
Whether B of A’s report is indicative of progress other banks are making in complying with the landmark settlement won’t be known until Joseph A. Smith, the settlement’s monitor, issues his own progress report on Monday.
It’s actually not surprising. BofA has been planning this for months. All of the indications in their side deal showed they would get off the hook for billions in principal reductions by laying the cost off on investors. I was screamed at for hours at a time over mentioning this before the fact. Now BofA casually put it in a finance report.
In all, 60% of the nearly $5 billion in BofA write-downs came from investors. JPMorgan Chase similarly reported that around half of their $3 billion in write-downs come from investor-owned loans. Basically, the banks are extinguishing half of their obligations under the settlement by paying for them with other people’s money. And “investors” in this case could include anyone, including public pension funds or whoever purchased a mortgage-backed security.
Yves Smith has more. It’s hard to feel good about an injustice like this, so let me just use the word “vindicated.” In that I’m vindicated that my instincts were correct about the apparatus of the federal government promoting this settlement were a bunch of brazen liars.