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BofA reaches $16.65B settlement over "toxic waste" mortgages

Loans date back to Countrywide and Merrill Lynch

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Bank of America (BAC) officially announced it reached a $16.65 billion settlement with the U.S. Department of Justice, certain federal agencies and six states to resolve claims over toxic residential mortgage-backed securities, collateralized debt obligations and an origination release on residential mortgage loans sold to Fannie Mae and Freddie Mac.

Bank of America failed to make accurate and complete disclosure to investors and its illegal conduct kept investors in the dark,” said Rhea Kemble Dignam, regional director of the SEC’s Atlanta office.  “Requiring an admission of wrongdoing as part of Bank of America’s agreement to resolve the SEC charges filed today provides an additional level of accountability for its violation of the federal securities laws.”

The loans primarily date back to Countrywide and Merrill Lynch prior to Bank of America’s acquisition of them.

Bank of America admitted to failing to disclose known uncertainties regarding potential increased costs related to mortgage loan repurchase claims connected to more than $2 trillion in residential mortgage sales from 2004 through the first half of 2008 by the bank and certain companies it acquired, the Securities and Exchange Commission said.

As a result, the lender will pay a total of $9.65 billion in cash and provide approximately $7 billion worth of consumer relief. 

U.S. Department of Housing and Urban Development (HUD) Secretary Julian Castro said: “This global settlement will strengthen the FHA fund and Ginnie Mae, and it will provide $7 billion in consumer relief with a focus on helping borrowers in areas that were the hardest hit during the crisis.  HUD will continue working with the Department of Justice, state attorneys general, and other partners to take appropriate action to hold financial institutions accountable for their misconduct and provide consumers with the relief they need to stay in their homes. HUD remains committed to solidifying the housing recovery and creating more opportunities for Americans to succeed.”

In a statement from HUD, the department outlined the consumer-relief aspect:

"The $7 billion in consumer relief will focus on areas that were hardest hit during the housing crisis. Consumer relief will take various forms including loan modification for distressed borrowers, including FHA-insured borrowers, and new loans to credit worthy borrowers struggling to get a loan in hardest hit areas, borrowers who lost homes to foreclosure or short sales, and moderate income first-time homebuyers. Bank of America will also make donations to community development funds, legal aid organizations, and housing counseling agencies to assist individuals with foreclosure prevention and to support community reinvestment and neighborhood stabilization and provide financing for affordable rental housing with a focus on family housing in high-cost areas.  An independent monitor will be appointed to ensure compliance with the terms of the agreement."

According to the SEC filing, “Bank of America knew that such wholesale channel loans – described internally as “toxic waste” – presented vastly greater risks of severe delinquencies, early defaults, underwriting defects, and prepayment.”

“We believe this settlement, which resolves significant remaining mortgage-related exposures, is in the best interests of our shareholders, and allows us to continue to focus on the future,” said Chief Executive Officer Brian Moynihan.

Although Countrywide Financial no longer exists, co-founder Angelo Mozilo is not in the clear as prosecutors attempt to still hold him responsible for the company’s role in the U.S. housing bubble. 

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