Bank of America yesterday padded its lead over other mega-banks in the aggregate amount of settlements paid out over the last three years by announcing two multi-billion dollar agreements in a matter of hours. Since the end of 2008, it has incurred $43.5 billion in payouts, an amount that exceeds the annual GDP of Lithuania, an admittedly small but industrious nation.
Today was a particularly strong performance by BofA in the race to rack up settlements. It settled a dispute over toxic mortgages sold to Fannie Mae by paying out $3.5 billion in cash, repurchasing poorly performing mortgages for $6.7 billion and returning $1.3 in fees it was paid for loan processing services. That adds up to $11.6 billion. In a separate agreement with the Fed and the Comptroller of the Currency, BofA is to be responsible for a share of $8.5 billion to be paid by 10 giant banks to mortgage borrowers -- $3.3 billion for mishandled foreclosures and $5.2 billion in loan modifications and fee reductions.
BofA absorbed Countrywide and Merrill Lynch during the financial crisis and much of this is attributable to the baggage that came with those firms. The good news for the bank is that the settlements will clear up long standing issues that have plagued it for years. The Fannie Mae settlement may allow BofA to once again sell mortgages to Fannie Mae, a procedure that had been suspended almost one year ago. BofA’s home mortgage business had shrunk dramatically as it abandoned third party mortgage funding, limiting its business to loans for existing customers. If the loan purchase agreement with Fannie Mae is reinstated as a result of the settlement, BofA may re-grow the mortgage loan business, providing more options for consumers by increasing availability of mortgage loans.
Similarly, the deal with the Fed and the Comptroller brings to an end the regulator-mandated “independent mortgage review” process that proved to be glacially slow and time-consuming for the bank as well as the borrowers.
So all of this removes shadows hanging over BofA, albeit at a massive cost. The bank suffered from wrongdoing at every level of the mortgage process -- from originations (via Countrywide and its own operations), to loan processing, to securitizations (largely a Merrill problem), to sales to Fannie and Freddie, to servicing and finally to foreclosures. The entire system was rotten to the core and BofA managed to end up responsible for a remarkably large share of the bad behavior that triggered the financial crisis and prolonged the nightmare of a recovery.
The question is whether the settlements were fair. The $11.6 billion Fannie Mae payout represents a large amount of money by almost any standards, but it must be remembered that the total taxpayer funding of Fannie and Freddie over the last 4 ½ years has been $137 billion. And the foreclosure and modification settlement is expressly viewed as an amount discounted for speedy resolution.
The thicket of wrongdoing and mis-management that BofA has been hacking through is a stark reminder of how bad the system was operating in 2007 and the years before and how that continued through the work-out phase after the meltdown. There is no doubt that the regulators were asleep at the switch or worse. But no system can work if it depends on the regulators overseeing every step that a business sector takes. Generally, the regulated businesses must attempt to comply with the law and act prudently. The businesses must at least be interested in their own survival as institutions.
The comprehensive mess that is BofA’s mortgage lending operation represents an assembly of organizations that were virtually disinterested in their prospects for survival, overwhelmingly concerned with executive bonuses.
BofA may have made progress on legacy liabilities. But much remains to be proven before restoration of the public’s trust that management can act as responsible stewards of such an important and massive part of the nations economy.