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B of A Signs HUD Pact Over Mortgage Abuse

The Department of Housing and Urban Development has reached a settlement with Bank of America that releases the company from liability for failing to adequately provide alternatives to foreclosure on 57,000 delinquent government-insured mortgages.

The agreement, a draft of which was obtained by American Banker, was previously undisclosed. It has been forged on a separate but parallel track from continuing settlement talks between Bank of America, state attorneys general and other regulators over alleged mortgage origination and servicing failures.

B of A's pact with HUD requires it to waive a minimum of $10 million in unpaid mortgage payments and vet each of the 57,000 delinquent borrowers for a possible loan modification, short sale or other foreclosure alternative.

"Our total costs for the program will be multiples of that" $10 million minimum, B of A spokesman Dan Frahm said. The deal calls for measures to "ensure these customers have every opportunity to stay in their homes," he added.

After such outreach, the settlement paves the way for B of A to foreclose on homes that borrowers could not afford even after a mortgage modification and those that have been left vacant by owners.

In forging the agreement, HUD decided to forgo steep monetary damages or admissions of error from the bank.

Instead, it pushed for the lender to implement steps that in most cases it was supposed to have already taken under the terms of its FHA-guaranteed loans, with the apparent aim of minimizing foreclosures and related insurance claims.

"We took the borrowers into account first," said HUD general counsel Helen Kanovsky. "We think that that's really the best thing for the FHA [insurance] fund as well."

The agreement is HUD's first involving settlement of claims in which a servicer failed to offer loss mitigation to borrowers. It does not, however, prevent HUD from seeking damages from B of A for unrelated origination and servicing failures.

"We fought for as narrow a [legal] release as possible and as much money as possible," Kanovsky said.

Under HUD's standard terms, borrowers must be less than 12 months delinquent to qualify for loan modifications. With the B of A settlement, the minimum of $10 million the bank agreed to pay will go to covering past-due arrearages and giving borrowers who are more than a year behind the possibility of qualifying for foreclosure alternatives.

The agreement was signed July 11 by B of A senior vice president Robert Gaither, who directed queries to a company spokesman.

All of the 57,000 borrowers covered by the agreement are 12 to 24 months delinquent. They account for only 4% of the total 1.5 million FHA loans that B of A services but a substantial portion of the company's seriously delinquent loans. B of A holds $19.8 billion in FHA-insured loans that are 90 days or more delinquent, and another $3.1 billion in FHA loans 31 to 89 days delinquent, the bank said in its second-quarter earnings release.

Under its terms with HUD, B of A will have to pay an independent monitor to review its modification work and report to HUD. It is also obligated to seek borrowers through database searches, letters, phone queries and visits to properties. Borrowers who fail to qualify for loan modifications, will receive from B of A $4,000 for a short sale and $7,500 for a deed-in-lieu of foreclosure.

The deal reflects the high levels of financial uncertainty surrounding such negotiations. In May, B of A agreed to pay $20 million, or double the minimum for the latest settlement, for improperly foreclosing on a relatively few 160 homes of military service members.

The settlement is "not a lot of money for the potential losses that the federal government may have to make good on," said Diane Thompson, an attorney for the National Consumer Law Center.

The minimum $10 million payment of borrowers' arrearages is unlikely to defray the FHA's losses on foreclosures, she said.

But if Bank of America is "able to identify the loans, and if people are still in the homes, and if they waive payments over past 12 months, then that's more valuable than a big fine for Bank of America," Thompson said. "But there are a lot of ifs there."

The largest banks hold billions of dollars of delinquent FHA loans on their balance sheets for which they have not yet filed claims. This may be because of concerns that they may have violated stringent HUD servicer requirements and could be held liable for treble damages related to false claims. One sticking point in settling such claims is that the FHA requires all servicers to have employees conduct face-to-face interviews with FHA borrowers once they become 60 days delinquent, a procedure most servicers either did not undertake or cannot document.

As part of the deal HUD has also agreed to pay any mortgage insurance claims and waive any pending administrative actions against B of A, its officers, directors or employees "in connection with servicing or loss mitigation deficiencies." The only exclusion is for allegations involving improper transfers of titles.

B of A also has agreed not to claim expenses on any FHA insurance claims for taxes, liens or property preservation incurred from November 2010 through July 2011.

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This is the cold hard truth. When banks use modifications no-one wins. If BofA would Do The Right Thing (which happens to be a core value of the bank). Would modify loans by reducing the principal to what the house is currently worth in todays market and reduce the interest rate at the current rate. The Bank would have to write off losses on the books however what they would have are customers who could afford to make payments. They would rather not do the right thing I know instead of BofA taking a $208,000.00 loss they could have taken a $60,000.00 loss and still recieved revenue on the loan. They really cannot even do basic math. Makes no sense. NSPearson
Posted by Noel S | Tuesday, August 23 2011 at 9:24PM ET
NOW BOFA IS CALLING ITS CUSTOMERS (HAPPENED TO ME) AND SAYING YOUR DELIQUENT. REP SAID YOUR PAYMENT FOR AUGUST 1ST HAS NOT BEEN PAID AND YOUR DELIQUENT. I SAID IT WILL BE PAID BY 15TH, HE ARGUES SAYS YOUR DELIQUENT. THEY ARE CONTINUING THE HARASSING CALLS THRU OUT DAY AND EVENING. THIS IS BEYOND BELIEF? THEY NEED TO USE THESE CALLERS TO HELP WITH SHORT SALES.
Posted by Marcia P | Wednesday, August 10 2011 at 9:44PM ET
Every negative equity homeowner is legally entitled to a consistent and similar financial advantage (modification) based on existing law, the principles of capitalism, the actions of the financial industry and the precedent set and it is the only capitialistic way of the Negative Equity Housing and Foreclosure Crisis.

There will be no change for the above homeowners or any other homeowner without We, the people standing together. I know I am not supposed to mention another web site but since the OCC settlement, HUD and the proposed AG's settlement is using it for a baseboard, borrowing ideas from it, without the teeth to enforce it, do you think it would be alright to print it: Unitedinprosperity to kind of level the playing field.
Posted by sue806@aol.com | Saturday, August 06 2011 at 11:51PM ET
If the redefault rate for BofA is 33%, then isn't the nonredefault rate 67%? It seems they would be happy to have 67% of their delinquent customers become current compared to 0% Likewise, Wells Fargo would have 71% of delinquent customers current. Sounds like a winner of a plan. However, Moody's bread is buttered by the banks so they will spin it to their advantage.
Posted by cwmisch | Friday, August 05 2011 at 10:10PM ET
Terry W. and Peter G. - truer words were never spoken. 'Skank' of America should have been put out of business years ago. The stories out in the press are only a fraction of the abuse, incompetence, negligence, and outright fraud that has been committed by this sorry excuse for a financial institution. I am unlucky enough to have an equity line with these clowns, and what they have done over the last couple of years to totally screw the loan up is beyond measure: illegally raising the loan margin interest rate; losing the original loan documents; failing & refusing to mail monthly statements on this account so that I no longer even know what the balance is, or even if payments were applied correctly; forging my signature on at least one document long after the fact when the above abuse was repeatedly pointed out to their deaf, dumb, and grossly incompetent employees; and finally, responding to a legal Qualified Written Request for a complete audit of this file by stating (in writing, finally) that "we don't find a loan for you in our system"...all the while trying to foreclose on our property through their equally moronic attorneys! Not even Hollywood could write a comedy script that could plumb the depths of this banks stupidity. Negotiate a Settlement with these chronic thieves and clowns? Why? This bank should be broken up and the pieces sold to other financial institutions that know what they are doing.
Posted by DENNIS K | Friday, August 05 2011 at 9:11AM ET
A new study by Moody's Investors Service, reported last week by DSNews.com, confirms the growing view that loan modifications programs such as HAMP are a failure.

The study authors looked at two million residential mortgage loans. They found that 47%, or nearly half, of loans that were classified as "current" after they had been modified re-defaulted within 12 months. As a comparison, only 16% of unmodified current loans defaulted within the same time period.

A relationship between payment reduction and likelihood of default was discovered: for every 20% that monthly payments were reduced, the borrowers were 10% less likely to redefault.

The most successful type of loan modification involved reducing the principal balance, which reduced monthly payments by an average of 34% and resulted in the lowest rate of re-default after 12 months. Lenders, however, are generally reluctant to reduce loan principal.

Other means of modifying loans, such as lowering interest rates, extending terms, and forbearance modification, reduced monthly payments by between 20-25%, and resulted in higher rates of borrowers re-defaulting.

The Moody's authors also compared the re-default rate between different major loan servicers. For this comparison, they used the likelihood of borrowers redefaulting within 6 months of their loan modification, for loan modifications initiated between early 2009 and the middle of 2010. They found a range in default rates, with Bank of America having the poorest record:
- Bank of America - 33%
- Wells Fargo - 29%
- American Home Mortgage - 26%
- Ocwen - 24%
- GMAC Mortgage - 23%
- JPMorgan Chase - 22%
- CitiMortgage - 20%
- Litton Loan Servicing - 20%
Lenders are becoming more aggressive in making sure that loan modifications result in lowered monthly payments, and this does seem to be improving the long-term success rate of loan modifications.

High default rates of loan modifications mean that, for many struggling homeowners, their loan modification was only a temporary fix. Failure to keep a modified loan current (or for many, failure to ever have their trial modification approved as permanent even if they did keep it current) can delay foreclosure. But for many, by the time their modified loan has become seriously delinquent, it is too late for them to attempt other strategies such as a short sale, and foreclosure has become their only option.
Posted by John B | Friday, August 05 2011 at 1:08AM ET
This doesn't apply in China ... business criminals frequently get a bullet in the back of the head. While this doesn't solve the problem it does serve to prevent residivism.
Posted by Phil B | Thursday, August 04 2011 at 9:01PM ET
This doesn't apply in China ... business criminals frequently get a bullet in the back of the head. While this doesn't solve the problem it does serve to prevent residivism.
Posted by Phil B | Thursday, August 04 2011 at 9:01PM ET
This doesn't apply in China ... business criminals frequently get a bullet in the back of the head. While this doesn't solve the problem it does serve to prevent residivism.
Posted by Phil B | Thursday, August 04 2011 at 9:01PM ET
What John B needs to understand is that the banks lose NOTHING when they modify a loan. Sure my monthly payments are now lower but by the time I pay off my modified loan, I will have paid B of A nearly $200,000.00 more than my non-modified loan. The only reason that banks don't want to modify loans is because Bankers don't help people out. Even if it is in their best financial interest. People who become bankers are just not nice people. They aren't going to help anyone. Ever. Just because.
Posted by terry W | Thursday, August 04 2011 at 8:32PM ET
Why were these criminals allowed to get off with a monetary punishment? They are guilty of fraud and total deception. AGAIN, BIG BUSINESS prospers and wins and the little guy gets the shaft.
Our country id heading for the END... down the toilet we go!
Posted by Judy a | Thursday, August 04 2011 at 7:45PM ET
When is the FBI getting involved? B of A and all the others are involved in a multiple criminal conspiracy. The RICO Act is very appropriate. Come on, do the right thing !!!!!!
Posted by Jerry g | Thursday, August 04 2011 at 7:43PM ET
I found out that this comment board is censored....what's wrong? Truth hurt?
Posted by Earl J | Thursday, August 04 2011 at 7:14PM ET
I found out that this comment board is censored....what's wrong? Truth hurt?
Posted by Earl J | Thursday, August 04 2011 at 7:13PM ET
I found out that this comment board is censored....what's wrong? Truth hurt?
Posted by Earl J | Thursday, August 04 2011 at 7:13PM ET
To "John B": Alert, my dear John, but some people -- in fact a LOT -- including myself, have been out of work for months if not a couple of years, not at our choosing, by the way. Pat yourself on the back for being such a good money manager; but don't forget, YOU may one day be out of work too, and then maybe you will have a bit of compassion.

BTW, I think the way this is being handled is absolutely criminal; but, guess what? Attorneys write the rules and break them. Need I say more?
Posted by Brian G | Thursday, August 04 2011 at 7:13PM ET
To "John B": Alert, my dear John, but some people -- in fact a LOT -- including myself, have been out of work for months if not a couple of years, not at our choosing, by the way. Pat yourself on the back for being such a good money manager; but don't forget, YOU may one day be out of work too, and then maybe you will have a bit of compassion.

BTW, I think the way this is being handled is absolutely criminal; but, guess what? Attorneys write the rules and break them. Need I say more?
Posted by Brian G | Thursday, August 04 2011 at 7:13PM ET
How unfair to the people like me who paid their mortgage. Maybe I should not have paid the mortgage and gone for "a modification" or "government help" The truth of the matter is that these people made an agreement to pay their monthly mortgage and if they had paid it we would not be even talking about this problem. It is unfair to the majority of American who actually struggled to pay their bills every month. It is not MY FAULT that people overextend themselves by their life choices, so why do I have to pay for it!
Posted by John B | Thursday, August 04 2011 at 6:53PM ET
How unfair to the people like me who paid their mortgage. Maybe I should not have paid the mortgage and gone for "a modification" or "government help" The truth of the matter is that these people made an agreement to pay their monthly mortgage and if they had paid it we would not be even talking about this problem. It is unfair to the majority of American who actually struggled to pay their bills every month. It is not MY FAULT that people overextend themselves by their life choices, so why do I have to pay for it!
Posted by John B | Thursday, August 04 2011 at 6:53PM ET
This amounts to $175 per homeowner screwed. This is totally insufficient, and will not cause B of A to change at all. If the average house had only 10k equity in it, they made 570 million. So now they have to pay back 10 million? And who do they pay it to? The screwed, evicted public, or to the government?
Posted by Jason B | Thursday, August 04 2011 at 5:40PM ET
This is OUTRAGEOUS.
Bank of America continues to filed backdated assignments of mortgages - this is absolutely frigging OUTRAGEOUS.
Posted by Liz C | Thursday, August 04 2011 at 5:27PM ET
$10M is less than pennies to bankers. $10B would be too little. The crimes committed by bankers is so egregious it is hard to put a price tag on it. We need to nationalize the top 5 big banks and now!
Posted by Janet W | Thursday, August 04 2011 at 5:01PM ET
It is amazing how the banks are let off the hook. They are just miserable with excess fees to feed the CEO bonus. The fine is pocket money and I wonder if it is more or less than the CEO bonus.
Posted by tom d | Thursday, August 04 2011 at 4:40PM ET
It is beyond me how fraud transforms into "abuse" when it comes to the financial industry. When corporations commit crimes their punishment is equivalent to getting a traffic ticket. Repeat offenders never get seriously punished. This two-tiered system of justice needs to be reformed. Where else in society can someone repeatedly commit crimes, never have to be personally accountable, and have the luxury of negotiating their own settlement?
Posted by Peter G | Thursday, August 04 2011 at 4:40PM ET
After two and a half years battling B of A to get a HAMP modification and the last six months trying to keep B of A from foreclosing on us even after we had recieved the modification, I know a bit about how B of A works. The first thing about this settlement that is ridiculous is that Brian Moynihan carrys $10,000,000.00 around in his wallet. This amount is not even going to be noticed by B of A. The second, and this is where my years of experience with B of A comes in, is that I can say without a bit of hesitation that B of A will simply ignore all the other settlement requirements. There is no enforcement agency that is going to make B of A comply. If there were such an agency, B of A would have been forced to comply with already existing laws that would have kept all of us from where we are today.
Posted by terry W | Thursday, August 04 2011 at 4:29PM ET
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