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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