BofA doesn’t believe in treating borrowers fairly

By Felix Salmon
March 9, 2011
Bank of America is setting up a bad bank, which will be run by Terry Laughlin.

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Bank of America is setting up a bad bank, which will be run by Terry Laughlin. Roughly half of its 14 million mortgages are going to be carved off and put into the bad bank, in an attempt, according to FBR analyst Paul Miller, “to get investors focus on the good” and as “a way to talk about good things and ignore the bad.” The presentation which Laughlin handed out talks about how his new group will work on loan modifications for delinquent customers: “as borrowers default,” he said, “we’ll evaluate them for a loan modification.”

Essentially BofA is doing two things here. One is to try to sweep its bad loans under the carpet by creating the new Legacy Asset Servicing unit; the other is to step up its pushback against the proposed mortgage-servicing settlement, which quite explicitly does include loan modifications for borrowers who aren’t in default. Check out part II.K.8:

Servicer’s employees shall not instruct, advise or recommend that borrowers go into default in order to qualify for loss mitigation relief.

This is something BofA hates — because it opens the door to underwater borrowers who are making timely payments being able to get a loan modification and thereby reduce the value of the loan. And BofA CEO Brian Moynihan is on the warpath against it, saying that such a system would be unfair to borrowers who don’t get their loans modified.

As Adam Levitin points out, Moynihan’s line of argument is pretty disingenuous. There’s nothing in the proposed settlement which forces BofA or anybody else to do anything unfair: indeed, BofA is encouraged to draw up its own set of standards and then apply them to all of its borrowers in a consistent manner. The real reason that BofA is fighting back is simple: if it behaved according to the settlement’s guidelines, it would lose some of that $35 billion to $40 billion a year that Moynihan reckons it should be able to make going forwards.

I’m pretty sure that no bank in the history of the world has ever made $40 billion in one year, and that no bank ever should, with the unique exception of the Federal Reserve. Bank of America is far too big to fail, and as such it benefits greatly from an implicit government guarantee. The least it can do in return is treat its borrowers fairly.

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Comments
7 comments so far

How to undo a big mistake… that’s the core question.

I made a big mistake… I bought a house I love in a great community at the wrong moment… 2006. I made a down payment but I’m still probably underwater. If I had bought no money down or 5% down I’d be way under water (even after $13,000) in principal paydown.

Ok, so now I want a re-do… I’m current on my loan but it’s not fair that I owe more on my house than it’s worth. Lets give me a current interest rate 5% instead of 6%, and shave $25,000 off the principal balance. Then I’d have some equity to protect and would be more more interested in making my monthly payments.

To compensate for the TRILLION DOLLAR COST of this national endevor we’ll just make all new mortgages bear the costs of modifying all the previous bad loans. We’ll do this by charging a higher rate or some kind of insurance rider. Either that or we could pull the trillion dollars out of the capital of the financial system and see how that works out.

Does this sound like a good plan to anyone?

Because it makes me want to puke.

Posted by y2kurtus | Report as abusive

I believe that the servicers have a lot of HELOCs carried on their books. The mortgage originators securitized the first mortgages but I believe the servicers then issued HELOCs and kept them on their books.

Normal lien precedence is that a first mortgage has first dibs on the asset followed by the second mortgage. My understanding is that many of the servicers carrying HELOCs are flipping this. They whack the first mortgage payments with tons of fees and penalties so that there is little left for the investors when the foreclosure finally goes through. As a result, the servicer may have to write off their HELOC but they have made up for a bunch of it with the additional income from the foreclosure process. The servicer doesn’t care what the final sale price of the home is as long as it exceeds the fees and penalties, since the value of the HELOC is probably long gone.

If the focus shifts to principal modifications, then the traditional lien precedence would require the elimination of the HELOC first before the first mortgage. This would be a huge blow to the servicers’ bottom lines as they would not have the fee and penalty income to offset the principal loss that they would need to take instead of the MBS investor.

It would be interesting to see the statistics of securitized first mortgages that have HELOCs held by the servicers with the total first and second lien amounts greater than the value of the house.

I believe that this problem may be so big that nobody has dared announce the emporer has no clothes, including the MBS investors that are getting screwed and the regulators.

Posted by ErnieD | Report as abusive

@y2kurtus

If you were Donald Trump or Sam Zell negotiating this for one of their commercial properties, the deal would probably already be cut with some modifications.

That is just sound business practice with a sharp eye for the bottom line and a clear understanding that litigation or allowing a commercial property to be foreclosed on is rarely good business practice for the bank.

However, since you are a homeowner, you will clearly be immoral and unethical (as well as a deadbeat and unpatriotic) if you request a similar deal.

Posted by ErnieD | Report as abusive

@ErnieD

It is exceedingly rare for a borrower like Trump or Zell who misses interest and principal payments and has negitive equity to retain control of the property in question. See the 5.4 billion dollar Stuyvesant Town buy for details. The real estate Moguls couldn’t make the debt service payments so….. they lost control of the properties to the lenders and also lost the equity they had invested.

It may shock heck out of you ErnieD but if you’ve got a job and 740 fico score you’ve got access to better financing terms that Warren Buffett can get for mighty Berkshire. 30 years fixed at 5% is a pretty sweet deal. That rate exists because of the ability to forclose.

If you want to tell people to walk away from their houses when they are in so far over their heads that there is nothing they can do that’s fine with me.

If you want the goverment to support a trillion dollar transfer of wealth to people (like me) who bought an overpriced house at the wrong time (2006) that’s NOT fine with me.

Posted by y2kurtus | Report as abusive

The amount of energy to figure out what is fair will never be calculated. Restitution is only favorable when everyone is whole.

For instance: I lost my mind working all night for eight hour’s pay making sure when anybody makes a cell phone call they have the best chance to get through and stay connected.

I alienated my family. I was too tired/stressed to plan a smart financial future.

The sad part is that looking back I could not have asked for more except that I could not enjoy this wonderful gift.

Here we are an insane nation of nice people hurting each other.

Wouldn’t it be better to just take care of our neighbors so we can enjoy time with out families?

How is your service? I lost my job two years ago and everything looks grim.

I hope this get’s figured out for you and yours.
::{

Posted by phyvyn | Report as abusive

that out was supposed to be our families.

Posted by phyvyn | Report as abusive

@y2kurtus

I’m coming in late to this conversation and you may never read this, but for those who come after, I want to reply to your statement:

“How to undo a big mistake… that’s the core question.”

Like you, we bought a house at the wrong time. We wanted a loan for 30 year fixed, but all the brokers and lenders told us we didn’t qualify (credit ratings just at 700), they convinced us that we would do better with an option ARM at 7.25%, this way we would have an option if we ran into some unforeseen circumstance along the way.

The first lender kept losing our paperwork, so we were relieved when Countrywide came on the scene. The biggest lender in the country wouldn’t cheat us? Right? My only condition was that there be no prepayment penalty and since the man helping us was the General Manager of 2 offices, we felt we could trust him. No problem.

Countrywide preapproved us, but it took longer than they said to get approval. We had to get an extension and three days before closing (on the extension) they produced the paperwork for us to sign…after 5 pm….in a restaurant…with a notary, and no sign of the professionals that wrote the loan.

This was not our 1st home. This was the 4th home we had purchased, We wanted this to be our retirement home, but it had never been like this before. People losing paperwork, not returning calls, contracts with strange small prints and confusing codicils. We had to ask them to explain so many things along the way.

The level of professionalism…and integrity had seriously deteriorated over the years. We were soon to find out just how much.

Their was no notation on the front pages of our mortgage contract as to the amount of our payment with principle and interest. The only thing on the front of the contract was the “option” payment. We were not new to buying a home, we asked about the full principle and interest payment. That is what we were planning on paying.

The notary had to find it for us, buried deep within the 375 page contract. The interest had increased from the time we originally applied for the loan and the time we signed. It was now 7.5% and we had to calculate, at the table, at 7 o’clock at night, three days before closing, if we could truly afford the difference.

We discussed it and we agreed that it would only be about $50 to $75 more per month and we would be okay. My husband was expecting a raise in about two months. It would be a little tighter than we had planned, but it was doable. We planned on getting another loan as soon as we could “qualify” for a 30 year fixed.

Then we saw the 3-year prepayment addendum and I was livid. We immediately got the General Manager on the phone to complain. This was a deal-breaker. This felt like entrapment. He talked to us awhile and asked us to at least agree to one year, because he couldn’t get it through without a prepay and we probably wouldn’t go through the whole process again before a year anyway. “Just sign it, and I will adjust it to a one year prepay.”

We changed the paperwork at the table and wrote his name as the authorization before signing and notarizing. We were reluctant to agree to one year, but it was the eleventh hour and we felt the pressure.

We put 10% down and we underreported our income. We could afford this.

After our 30 day escape clause was up our loan amount increased from 7.5 to 8.5%. Our second increased from 7.75 to 13%, and the trap I feared snapped closed on our dream.

We were ashamed and embarrassed that we could fall for such a trap and we were astounded that the professionals were okay with doing this to people without compulsion. But, hey, at least we weren’t locked in for 3 years, right? We could undo this mistake, right?

Before the year was up, we qualified and were prepared to leave that horrible predatory loan behind and move on to another loan….and if you didn’t guess or see it coming….Countrywide would not release us from the 3 year prepayment penalty.

Our house still had value then, but the additional amount they tacked on increased our liability to 90% and no lender wanted to take that on. I wrote and complained. Countrywide sent us back a copy of our adjusted prepayment penalty (hand-changed to one year) along with a letter telling us we knew what we were signing.

I faxed it back to them circling the changes and the notary mark and they still would not release us. Meanwhile, months passed and our debts increased and the loans we lined up fell by the wayside.

As grownups, who were not hurting financially, at that time, we felt we had recourses. We sought out an attorney and a jury trial. It has been four years and we have yet to see the inside of a court room. In addition the opposing counsel has petitioned the court to remove our evidence and the court has expressed that they are considering complying….even though the paper is a signed notarized part of our contract.

My answer to your question: Does it sound like a good plan to anyone?

My answer is “Yes.” Yes it does. I think that everyone who got a loan from 2006 on, should be able to have a lowered interest rate and a shared proportionate reduction in principle. I do not think that banks should be able to cheat people and get away with it. If we did it we would be penalized into the next century.

I do not think it is right that a bank can cheat people like this, then foreclose on their home and turn around and sell it for about $200,000 less, when if they had just reduced it for the current owner by a fraction of that amount, they would have a grateful customer and future business. They would have lost far less money than they are losing now in legal fees and foreclosed homes and the increase of people who are afraid to purchase anything at this rate.

It would have been good business, and their loss would have been far less than it is going to be now. We have not yet begun to see the extent of this corruption.

http://www.youtube.com/watch?v=kx7HDTDDo pA&feature=player_embedded

Posted by Renoira | Report as abusive
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