Bank of America settlement likely to help few homeowners

WASHINGTON – Bank of America’s record $16.65 billion settlement for its role in selling shoddy mortgage bonds – $7 billion of it geared for consumer relief – offers a glint of hope for desperate homeowners.

The settlement requires the second-largest U.S. bank to reduce some homeowners’ loan balances, provide new loans to low-income buyers and address areas of neighborhood blight.

But consumer advocates say relatively few people will be helped relative to the devastation triggered by the mortgage bonds, which fueled the worst financial crisis since the 1930s and threw millions of homes into foreclosure.

Only a fraction of homeowners would be eligible for refinancing under the settlement. And the process by which people would qualify and receive aid could drag on for years, with payouts set to be completed as late as 2018.

Those who have already lost homes to a foreclosure or a short sale – when a lender accepts less money from a sale than what the borrower owes – wouldn’t likely benefit at all.

“It is certainly better than nothing,” said Bruce Marks, chief executive of the nonprofit Neighborhood Assistance Corporation of America. “But for the millions who lost their homes, it reinforces the appearance that the government has not been on their side.”

The settlement will include the appointment of an independent monitor to review the consumer relief. This could take weeks and mean that “thousands of people who right now are in default or foreclosure” will miss the chance to reduce their mortgage balances, said Shanna Smith, president of the National Fair Housing Alliance.

Smith’s organization has investigated the fallout from the foreclosures. It has filed a complaint with the Department of Housing and Urban Affairs that banks failed to maintain properties after borrowers defaulted. The alliance said it found that Bank of America enabled foreclosed homes in minority communities in Orlando, Denver, Memphis, Atlanta and elsewhere to slide into disrepair.

As part of the consumer relief, Bank of America has essentially pledged to help remedy the neighborhood blight its neglect helped cause when it auctioned off foreclosed homes at steep discounts, Smith said.

“Bank of America created the problem,” she said.

The agreement with Bank of America caps a trio of deals over the past nine months, each designed to punish leading financial institutions for their roles in bundling subprime mortgages into securities that were misleadingly sold as safe investments despite the high likelihood that borrowers would default.

JPMorgan Chase & Co. agreed to a $13 billion settlement while Citigroup reached a separate $7 billion deal. Though the JP Morgan settlement was announced in November, the planned $4 billion in relief has yet to benefit many homeowners, according to the Home Defenders League, a national advocacy group.

Bank of America had initially resisted a settlement, because almost all the bad mortgage securities that led to the settlement came from Countrywide and Merrill Lynch, the two troubled firms the bank acquired in 2008 as the financial meltdown erupted.

But a federal judge in Manhattan ruled in a separate case that Bank of America was liable for those pre-merger mortgages and issued a penalty of nearly $1.3 billion. That helped spur the bank to forge a deal, with CEO Brian Moynihan saying Thursday that it is “in the best interests of our shareholders and allows us to continue to focus on the future.”

The settlement will resolve allegations that the bank and companies it later bought misrepresented the quality of loans they sold to investors. Besides the consumer relief, the deal includes a $5 billion cash penalty and $4.6 billion in remediation payments. The consumer relief and remediation payments could be tax-deductible for Bank of America.