Cutting borrowers’ balances
Last month, after months of being stalled, Bank of America and the four other largest American mortgage servicers settled for $25 billion in a civil suit between 49 states’ attorneys general and the federal government. According to the Wall Street Journal, Bank of America has struck a side deal to allow the bank to reduce penalties in exchange for larger cuts to borrowers’ mortgage balances.
Various agencies have been pushing for principal reductions as a means of propping up housing and reducing the high foreclosure rates. Bank of America will reportedly make bigger cuts than other banks to avoid up to $850 million in penalties, giving 200,000 homeowners the option to reduce the balances owed on their mortgages.
The Journal notes the side deal is unique to Bank of America, citing a senior administration official, noting that many of the reductions will be made on loans that were originated by Countrywide Financial and packaged into securities. Bank of America acquired Countrywide in 2008, along with their good and bad assets. The deal is unique because investors in the mortgage-backed securities may feel an impact as a result of Bank of America’s new side deal.
Massive principal reductions
According to Reuters, qualified borrowers are expected to receive principal reductions averaging over $100,000, citing a Bank of America spokesperson. Those receiving the reductions will see their mortgage balance cut to their home’s current market value, as opposed to the other banks in the settlement that cannot cut principal by over 120 percent of the home’s value.
Bank of America will pay nearly $11 billion of the $25 billion mortgage settlement, having the most liability after the real estate crash, particularly through their Countrywide acquisition.
Bank of America, Ally Financial, JPMorgan Chase, Citigroup and Wells Fargo have settled civilly, but all remain vulnerable to criminal charges which are being pursued by a task force recently formed by the Obama administration.