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BofA's $17B settlement not as large as it appears

By Michael Virtanen

Associated Press

Published: Thursday, Aug. 21 2014 7:36 a.m. MDT

FILE - This Tuesday, Jan. 14, 2014 file photo shows a Bank of America sign in Philadelphia. Officials familiar with the deal say Bank of America on Wednesday, Aug. 20, 2014 has reached a record $17 billion settlement with federal and state authorities over its role in the sale of mortgage-backed securities in the run-up to the 2008 financial crisis.

Matt Rourke, File, Associated Press

Enlarge photo»

WASHINGTON — Bank of America's purchase of Countrywide Financial has cost it tens of billions of dollars over the past six years. An expected $17 billion settlement with the Justice Departm ent will increase that toll, but not by a full $17 billion.

That sensational amount, which would be the largest mortgage settlement to date with the department, is expected to include $7 billion in consumer aid. But as with previous settlements with JPMorgan Chase and Citigroup, the true cost of that relief is likely to be a good deal less.

The expected Bank of America settlement will resolve allegations that the bank and companies it later bought misrepresented the quality of loans they sold to investors. Most of the problem loans were sold by Countrywide Financial and Merrill Lynch before Bank of America bought them during the 2008 financial crisis. To settle the government's claims against the three companies, Bank of America will pay $9.65 billion in cash in addition to providing the $7 billion of consumer aid, according to officials directly familiar with the matter who spoke on condition of anonymity because the deal wasn't scheduled to be announced until Thursday at the earliest.

Bank of America declined to comment on any settlement-related topics Wednesday.

Whether cash payments are structured as penalties or legal settlements can determine whether targeted companies can declare them as tax-deductible business expenses. Also, consumer relief is an amorphous cost category: If Bank of America's deal resembles the department's previous settlements with JPMorgan and Citigroup, that part could be less costly to the company than the huge figures suggest.

Some of the relief will, in fact, come in the form of cash donated to community organizations or, in Citi's case, lending money to affordable housing projects at below-market rates. But much of the relief will come from modifying loans that the banks have already concluded could not be recovered in full. Reducing the principal on troubled loans often just brings the amount that borrowers owe in line with what the banks already know the loan to be worth.

Settlement math also affects the actual cost of the deals, allowing banks to earn a multiple for each dollar spent on certain forms of relief. Under Citi's deal, for example, each dollar spent on legal aid counselors is worth $2 in credits, and paper losses on some affordable housing project loans can be credited at as much as four times their actual value.

How much the total package of cash and noncash borrower aid is worth is impossible for outside observers to say.

"Companies that have reached for these settlements have not taken an explicit charge for it," said Moshe Orenbuch, a banking stock analyst for Credit Suisse who has debated how to value noncash settlements with clients.

In discussing the deals with analysts, the banks "always say, 'Just remember, there's the piece that's cash and the piece that's not cash.' In general terms, they're suggesting that the relief is stuff they're doing anyway."

Beyond the bonus credits, the lengthy durations of the deals mean banks can accrue some of the credits they need simply by running business as usual.

JPMorgan, for example, must provide roughly $2 billion of principal reductions to homeowners before the end of 2017. That is one-fifth the $10 billion that the bank forgave between 2009 and 2012, according to its annual social responsibility reports.

Even before its settlement with the Justice Department, the bank had committed itself to continuing the same principal reduction programs.

Both the Justice Department and the banks declined to comment Wednesday.

Consumer advocates said settlement amounts can obscure the actual costs at stake. But since the disputed business behaviors affected mortgage investors, not mortgage borrowers directly, they welcome any consumer aid.

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