If you’ve been following Bank of America news then you know the bank has been working out some deals to resolve a number of issues, including faulty mortgages it sold before the financial crisis of 2008. While all of the deals among investors are not complete, Bank of America has managed to make one major compromise to date. Let’s take a closer look at why the bank is making these deals and what they entail. Why Bank of America Is Making Settlement DealsIn December 2010, Bank of America was in talks with a group of major investors in an attempt to settle charges that it mishandled billions in mortgages that were packaged into bonds. The group, which included mutual-fund managers, insurance companies, government-related entities and investment partnerships, had given the bank 60 days in October to respond to allegations that it didn’t handle 115 bond deals properly. The group noted that as a mortgage servicer, the bank was responsible for collecting mortgage loan payments, as well as working with troubled borrowers. However, the investors felt BofA didn’t hold up its end of the bargain. They alleged that the bank didn’t meet underwriting requirements and, in general, handled mortgage servicing in a sloppy fashion. Also, the group questioned the warranties made on the loans that were packaged into bonds and distributed to investors. It thinks the bank’s mishandling and mismanagement result in compromised mortgages and the bad warranties on those mortgages contributed greatly to the financial crisis. In an effort to recoup their losses, the investors wanted to have the loans, originally issued by Countrywide Financial Corp, repurchased by the bank (Bank of America purchased Countrywide to halt bankruptcy during the crisis). BofA originally planned to fight the allegations, but eventually agreed that its mismanagement was prevalent and decided to settle. The Freddie Mac and Fannie Mae DealIn the midst of its dealings with investors, it was able to work out a compromise with two, Freddie Mac and Fannie Mae, both entities that were forced to be overhauled by the government in 2010 to avoid collapse. The bank agreed to resolve disputes with both mortgage lenders by paying $2.8 billion to cover the $127 billion in loans it sold based on faulty information. It paid 1.28 billion to Freddie Mac and more than $1.52 billion to Fannie Mae on Dec. 31. After the deal was made public by the bank, lawmakers stepped forward to criticize what has been described as a “backdoor bailout” because it agreed to buy back loans for pennies on the dollar. Among critics was California Rep. Maxine Waters, who expressed concern that the settlement did not require enough from the bank and therefore is forcing taxpayers to swallow too much of the debt from the bad loans. Her argument was if the bank is not required to pay back the bulk of the debt for the bad mortgages, the responsibility to cover the losses would be left in the hands of the American people. But some have defended the deal, noting it was a favor to the bank for buying Countrywide and Merrill Lynch during the crisis. More Settlements to ComeWhile Fannie/Freddie debates continue to surface, BofA is still set to make deals with other investors, including PIMCO, BlackRock and the New York Fed. According to recent reports, the bank sold about $750 billion of mortgage-backed assets PIMCO and BlackRock prior to the crisis. As a result of these bad mortgage deals, some believe that putbacks could reach $9 billion to as much as $85 billion over the next few years. Between PIMCO and the New York Fed, along with other investors, the bank allegedly will need to pay at least $47 billion to clear its debt. These investors are not expected to be as lenient as Fannie Mae and Freddie Mac were. Some other issues the bank is expected to face include litigation from private mortgage insurers like Ambac Financial Group and MBIA, both of which allege they were duped by BofA in securing insurance for securities backed by poorly underwritten loans that were destined to default. Also, some have criticized the bank’s new four-tier system that will impose a ton of fees on customers who don’t follow specific guidelines. There’s no doubt that Bank of America is in the midst of a massive restructuring process that includes paying for its mistakes (bad mortgage deals, robo-signing foreclosures), dealing with changes to the financial sector and compensating for losses through increased fees. So we are sure to hear more Bank of America settlement deals in the coming months as more information is revealed about what steps it is taking and how those steps will affect homeowners and its customers. http://www.gobankingrates.com/mortgage-rates/...mortgage-settlements/ |
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