B of A Will Beat Deadline for Complying with Mortgage Settlement

Bank of America (BAC) said Wednesday that it has so far offered $15.8 billion in consumer relief under the national mortgage settlement and that it expects to meet all of its financial obligations by the end of February – two years ahead of its deadline.

Most of the relief continues to come in the form of short sales, though principal reductions given to delinquent or underwater borrowers now account for about one-third of the total, B of A said in a conference call detailing its progress on the settlement, which stemmed from banks’ so-called “robo-signing” of foreclosure documents.

In a surprising revelation, the Charlotte, N.C., lender also said that more than half of the nearly $5 billion in principal reductions will be paid for by investors, not the bank itself. That matters little to delinquent borrowers who saw their monthly payments reduced, but it is sure to anger investors who have argued that they should not have to be punished for banks’ mistakes.

Whether B of A’s report is indicative of progress other banks are making in complying with the landmark settlement won’t be known until Joseph A. Smith, the settlement’s monitor, issues his own progress report on Monday.

The top five mortgage servicers – Ally Financial, Bank of America, Citigroup (NYSE:C), JPMorgan Chase (JPM) and Wells Fargo (WFC) – all filed reports Wednesday with the monitor and state attorneys general but only B of A held a conference call with reporters to discuss its progress.

The settlement was designed to address servicing abuses that led to the robo-signing of foreclosure documents and requires banks to reimburse borrowers who were harmed. Under terms of the deal signed with state attorneys general, the servicers have three years to provide relief to borrowers in the form of principal reductions, short sales, second-lien forgiveness and refinancings.

The servicers, though, are eager to put the settlement behind them and are moving at breakneck speed to meet their targets.

"We’re on path to deliver all of our responsibilities on consumer relief and servicing standards by the end of February," said Eric Telljohann, a B of A senior vice president.

Consumer advocates have been critical of banks for focusing more on short sales than principal reductions, though Telljohann said on the call that, when all is said and done, relief will be roughly divided equally between short sales, debt forgiveness and refinancings.

Investors who bought loans from B of A, though, are frustrated that they are being forced to take a haircut on their investments.

Mortgage bondholders have long complained that the terms of the national mortgage settlement were unfair because the five largest servicers received credits for principal write-downs in which the losses are taken by bondholders.

The settlement was structured to give servicers 45 cents of credit for every dollar of principal reductions paid for by investors. Banks will receive $1 of credit for every dollar of principal write downs on mortgages they own.

“Investors remain very concerned about the implementation of the settlement,” said Chris Katopsis, executive director of the Association of Mortgage Investors, a bondholder trade group.

“The attorneys general have no problem letting the banks pay their fines with other people’s money,” added Bill Frey, principal and CEO Greenwich Financial Services.

But Telljohann said the goal of the settlement is to prevent foreclosures regardless of who took the loss for principal write-downs. He added that B of A had already received approval from the majority of investors to take principal write-downs and avoid losses from foreclosures.

“We’re not doing any movement against one portfolio or another,” Telljohann said. “This is not a hit per se. It is our belief that by providing this payment relief we are preventing a foreclosure event from happening.”

B of A completed or offered $4.75 billion in principal reductions to 30,000 borrowers as of Sept. 30. Of those, roughly 40% of the write-downs were given to borrowers whose loans are held in B of A’s own portfolio. Mortgage bondholders, meanwhile, will bear the brunt of losses on 60% of the loans. The average principal write-down on first lien mortgages was $150,000.

Telljohann said B of A made offers to all eligible borrowers who had a delinquent or “underwater” mortgage, in which the borrower owed more on the loan than the home is worth.

B of A also modified or extinguished $2.5 billion in home equity loans or lines of credit for 45,000 borrowers. The bulk of its relief came from $7.4 billion in short sales or deeds-in-lieu of foreclosure. It gave another $617 million in relocation assistance and deficiency waivers and $250 million in interest rate reductions through the end of September.

Diane Thompson, a lawyer at the National Consumer Law Center, said consumer advocates want servicers to give principal reductions and they don’t necessarily care who pays for them, whether it’s the bank or investors.

Banks have cut principal on more loans in their own portfolios, she says, because they bear the risk of default and foreclosure costs. In addition, banks take a hit on loans they service but don’t own when the principal balance is reduced.

“Investors for a long time have wanted to do principal reductions because they’re losing money on foreclosures,” Thompson said. “Yes, servicers are getting credit under the settlement but the point of it was to get servicers to reform their practices, not to punish them.”