The Bank of America Mortgage Settlement Fiasco
Research support for this article was provided by the Investigative Fund at The Nation Institute.
Just as the American housing market was starting to recover from its worst battering since the Great Depression, a new scandal, an epidemic of flawed or fraudulent mortgage documents, threatens to send not just the housing market but the entire economy back into a tailspin. As we go to press, forty-nine state attorneys general have announced an investigation of the mortgage-servicing industry, in the wake of decisions by Bank of America, JPMorgan Chase, Ally Financial's GMAC and other banks to suspend some foreclosures, and amid demands by some lawmakers for a nationwide moratorium on all foreclosures.
It's impossible to tell at this early stage how deep the new crisis extends, but as they begin their investigation, the attorneys general would do well to re-examine the deeply flawed 2008 agreement with Bank of America in resolving the Countrywide Financial scandal, the largest anti–predatory lending settlement in US history. If they do, maybe they'll get it right this time.
On October 6, 2008, a scant three weeks after Lehman Brothers filed for bankruptcy, with the financial crisis in full swing, California Attorney General Jerry Brown called a press conference in San Francisco. He announced that day, to great fanfare, "the biggest loan modification in American history." Brown joined Illinois Attorney General Lisa Madigan in leading negotiations for eleven states that had sued Countrywide, the largest mortgage lender in the country. He held up Countrywide, which had been acquired by Bank of America some months earlier, as a symbol of all that had gone wrong in the housing bubble.
"Countrywide exploited the American dream of homeownership," Brown said in announcing his lawsuit the previous June. He charged the lender with deceiving borrowers by misrepresenting loan terms, hiding scheduled payment increases and persuading people to sign up for loans they couldn't afford. "Countrywide was, in essence, a mass-production loan factory, producing ever increasing streams of debt without regard for borrowers," he said. "Californians...were ripped off by Countrywide's deceptive scheme."
When Madigan announced her state's lawsuit, she took to the stage with a single mother who'd lost her home after refinancing a fixed-rate loan with one from Countrywide featuring a ballooning adjustable rate. "Borrowers were in loans that they didn't understand, they couldn't afford and they couldn't get out of," Madigan said. "The failure of these loans is what has caused the foreclosure crisis here in Illinois and across our country. And the aim of today's lawsuit is to hold Countrywide accountable."
If all fifty states were to sign on to the settlement, Brown's office estimates (forty-four have so far), it would provide $8.68 billion in reduced payments and fee waivers to some 400,000 Countrywide borrowers struggling to stay in their homes. And a small Foreclosure Relief Fund of $150 million would provide direct payments to Countrywide borrowers who have already lost their homes to foreclosure. Various media called the settlement a "landmark," "a win for homeowners" and "the nation's most comprehensive mortgage-modification program," reporting that 8,000 homeowners in Ohio, 13,000 in Arizona, 57,000 in Florida and 120,000 in California would all "escape foreclosure" through major loan modifications. Relief Is in Sight, read one headline.
But two years later, many Countrywide borrowers facing foreclosure have not even been notified that they may qualify for the settlement. It has kept, at best, about 134,000 families in their homes, and most of these only temporarily. Countrywide and its parent company, Bank of America, have blocked many subprime borrowers from access to the best aspect of the deal—principal reduction—in favor of short-term fixes that could easily spell disaster down the road. The settlement is silent on the question of second liens—home equity loans—which have played such a significant part in the foreclosure crisis, jeopardizing the possibility of truly affordable modifications. And the biggest loophole of all? Bank of America has the right to foreclose on the victims of Countrywide's predation whenever its analysts determine—using an undisclosed formula—that it can recoup more money through foreclosure than by modifying the loan.
In fact, the settlement has functioned more as loss mitigation for BofA and investors in mortgage-backed securities than as recompense for victims of predatory lending, says Alan White, an associate professor of law at Valparaiso University and an expert on the subprime crisis. "You are not actually asking [Bank of America] to give up money," says White, who frequently testifies before Congress on mortgage issues. "You are asking them to do something that will make them more money or mitigate their losses. It is a weird way to have somebody pay for past misconduct."
"The state attorneys general have done far more than anyone else, and they were under tremendous pressure not to act," says William Black, an associate professor of economics and law at the University of Missouri, Kansas City, and a federal fraud investigator during the savings and loan scandal. "That said, the settlement does not go to the basic problem, which was fraud by Countrywide."
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The lawsuits described a vast "conspiracy" in which Countrywide provided financial incentives to large networks of brokers in exchange for their duping borrowers into taking out toxic loans. In violation of state law, brokers concealed or misrepresented the steep monthly payment increases borrowers faced when mortgage rates readjusted a year or two down the road.
For several years, the scam worked. Countrywide grew from originating $62 billion in loans in 2000 to more than $463 billion in 2006, while the lender's securities trading volume more than quintupled, from $647 billion in 2000 to $3.8 trillion in 2006. The company's CEO, the flashily dressed and perma-tanned Angelo Mozilo, became one of the highest-paid executives in the nation, with an influence on markets approaching that of Alan Greenspan.
The state lawsuits expose just how Countrywide built its sprawling empire. One common loan product that came under harsh criticism in the lawsuit was the hybrid adjustable rate mortgage, or ARM, in which mortgage rates were fixed for two to three years while borrowers made interest-only payments. Afterward borrowers got hit with "payment shock" when mortgage principal was added onto their monthly payments just as the starter interest rate converted to a variable rate that could shoot up to as high as 15 percent.
Brown's lawsuit charges that Countrywide's goal was to generate loans that paid the highest possible interest rate—not loans that offered the best deal for their customers. Low-income, first-time homebuyers became some of the best targets: the riskier the loan, the higher the interest rate. Countrywide packaged many of these loans into mortgage-backed securities and sold them to Wall Street for windfall profits. Securities comprising Countrywide loans were in turn used to structure collateralized debt obligations, or CDOs, the implosion of which almost brought down the US financial system. Risky Countrywide loans were linked to some of the most toxic CDOs. On July 24, 2007, when Mozilo announced in a call with Wall Street bankers that housing prices would collapse on a scale not seen since the Depression, widespread panic ensued. By the end of 2007, according to Countrywide's own estimates, a staggering 27 percent of the lender's subprime loans were delinquent.
Once disaster struck, a quick settlement with the state attorneys general, under which Countrywide accepted no guilt and faced little financial liability, was not such a bad deal for the company. The settlement required Countrywide to make only 50,000 loan modifications nationwide and did not set a dollar amount on how much these modifications had to save borrowers. Most of the loans covered by the settlement fell into one of two major types issued between 2004 and 2007, at the height of the housing boom. One was the notorious pay-option ARM, in which the loan balance increased each month for borrowers who made only the minimum payment. Countrywide absurdly classified these loans as "prime" products—even though many of them went to borrowers with very low credit scores—making it easier to sell them on the secondary market. The other was the subprime ARM, which had a fixed interest rate for a set period and then an adjustable rate for the remainder of the term.
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To comply with the settlement, Bank of America set up the Countrywide National Homeownership Retention Program as a vehicle for providing relief. And the deal appeared, at first, to provide it. Eligible borrowers, according to Brown's analysis of the deal, may be considered for a range of modifications. Those with pay-option ARMs can reduce their outstanding balance to 95 percent of their home's current value, getting them out from under water. In addition, borrowers with subprime ARMs may qualify to pay interest for only ten years, get interest-rate reductions and even have their interest rate permanently capped at the introductory rate. But Countrywide has no obligation to offer these terms to any particular eligible borrower.
A key weapon in BofA's arsenal is something called a foreclosure avoidance budget, which gives the bank the option of foreclosing on homeowners whenever, in the judgment of the bank's analysts, more money can be recouped by foreclosing than by modifying the loan. Housing advocates speak with frustration of how BofA often refuses to grant modifications to eligible borrowers, based solely on the bank's analysis of its foreclosure avoidance budget. Yet bank officials have refused to make public how they calculate that budget. Lisa Sitkin, a lawyer with Housing and Economic Rights Advocates, an Oakland-based nonprofit, says she repeatedly attempted to obtain that information from BofA. "One of the things we kept asking," she says, "is, Can we see those analyses? Can we see the foreclosure avoidance budget? The answer was always no." In the end, she simply gave up on using the Countrywide settlement as a means of helping borrowers. Even information on how many homeowners are facing foreclosure under the foreclosure avoidance budget is not publicly available. I requested these numbers from the California attorney general's office, which directed me to Bank of America, which refused to divulge the data.
Last January I interviewed Terry Francisco, Bank of America's senior vice president for public relations and communications, at a meeting between BofA executives and distraught homeowners in a church in Antioch, California, and he said something telling: "We don't call it a settlement, but our agreement with the attorneys general." Apparently BofA doesn't believe it owes anybody anything.