BofA Rolls Out $8.4 Billion Loan Mod Program
The mortgage bailout for Main Street has officially begun, in the shadow of a $700+ billion bailout of Wall Street signed into law on Friday afternoon by President Bush. A slew of lawsuits against Countrywide Financial Corp. led Bank of America Corp. (BAC) to announce late Sunday evening what will likely end up being the single largest predatory-lending settlement in American history, with the bank unveiling an $8.4 billion program to modify 400,000 Countrywide-originated mortgages nationwide. Bank of America purchased Countrywide earlier this year. North Carolina-based BofA said the program, which will involve heavy interest rate and principal reductions for hundreds of thousands of borrowers -- more than a quarter of them in California -- was "designed to achieve affordable and sustainable mortgage payments for borrowers who financed their homes with subprime loans or pay option adjustable rate mortgages serviced by Countrywide." The deal comes as numerous state attorneys general have sued Countrywide this year for making loans alleged to be deceptive and abusive, including the AGs from California, Connecticut, Illinois, Florida, and West Virginia. "We are confident that together with the Attorneys General we have developed a comprehensive program that provides more solutions than ever before to assist troubled borrowers and put them back on the path to sustained home ownership," said Barbara Desoer, head of BofA's mortgage operations. BofA said that all subprime and option ARM loans originated prior to the end of 2007 will be eligible for relief under the program, and that the massive modification program will be implemented by December of this year. Until then, the bank said it cease all foreclosures for borrowers it deems likely to qualify for a modification under the program -- which pretty much means all subprime and option ARM borrowers that still have a mortgage, sources told HW. Bank of America has already been halting most of its foreclosures in the state of California; HousingWire reported on Aug. 12 that July notices of default in the Golden State had fallen dramatically, and that 91 percent of the drop was due to files serviced by BofA/Countrywide. The bank will target a 34 percent ration of PITI to income in restructuring loans, at least for the first year, according to a press statement; while full details weren't in the statement, BofA alluded to "limited step-rate interest rate adjustments" in subsequent years. It will also waive late fees and prepayment fees for affected borrowers. Joe Price, BofA CFO, said that while the program would extend to all qualifying mortgages serviced by Countrywide, only 12 percent of eligible loans are currently owned by BofA. As a result, the majority of modifications that BofA will look to do will be subject to compliance with servicing contracts and will require investor approval -- officials at BofA did not comment on the liklihood of investors approving specific forms of loan modifications, but early reaction from our sources suggests that reaction may not be positive. A similar loan modification campaign was put into place by the Federal Deposit Insurance Corp. in late August at IndyMac Federal Bank after the government took control of the bank and servicing operation on July 11th from Indymac Bancorp; the status of the government's efforts to initiate wide-scale modification generated significant recoil among investors and ABS/MBS analysts at the time. "The implications of these modifications on the securitized MBS market are significant," wrote Deutsche Bank's director of RMBS trading Christopher Helwig at the time, in a note to clients. "Rate reductions lead to potential interest shorfalls causing deals to miss their overcollateralization targets and fundamentally weakening credit enhancement to senior note holders. While this may have the net effect of flattening the CDR curve, this will in all likelihood not improve deal performance." BofA also said it would set aside $150 million for borrowers who have already lost their homes due to foreclosure, and another $70 million to fund assistance for borrowers whom foreclosure is their only option. The program effectively represents that largest settlement against predatory lending in U.S history, towering over the previous two largest: a $484 million settlement involving Household Finance Corp. in 2002 and a $325-million settlement involving Ameriquest Mortgage Co. in 2006.