LITTLE ROCK — Bank of America agreed Monday to pay more than $10 billion to Fannie Mae to settle claims over troubled mortgages that soured during the housing crash, mostly loans issued by the bank’s Countrywide Financial subsidiary.
Separately, federal regulators reached an $8.5 billion settlement Monday to resolve claims of foreclosure abuses that included flawed paperwork used in foreclosures and bungled loan modifications by 10 major lenders, including JPMorgan Chase, Bank of America and Citibank. About $3.3 billion of that settlement amount will go toward Americans who went through foreclosure in 2009 and 2010, and $5.2 billion will address other assistance to troubled borrowers, including loan modifications and reductions of principal balances. Eligible homeowners could get up to $125,000 in compensation.
“When we began the Independent Foreclosure Review, the [Office of the Comptroller of the Currency] pledged to fix what was broken, identify who was harmed, and compensate them for that injury,” Comptroller of the Currency Thomas Curry said in a statement. “While today’s announcement represents a significant change in direction, it meets those original objectives by ensuring that consumers are the ones who will benefit, and that they will benefit more quickly and in a more direct manner.”
Homeowner advocates said Monday that the foreclosure deal allows banks to escape responsibility for damages that might have cost them much more. Regulators are settling at too low a price and possibly at the expense of the consumer, they said.
“This was supposed to be about compensating homeowners for the harm they suffered,” said Diane Thompson, a lawyer with the National Consumer Law Center. “It’s another get-out-of-jail-free card for the banks. It caps their liability at a total number that’s less than they thought they were going to pay going in.”
The companies involved in the settlement also include Wells Fargo, MetLife Bank, PNC Financial Services, Sovereign, SunTrust, US Bank and Aurora Bank.
The two agreements are not directly related, but they illustrate the extent of the banks’ role in the excesses of the credit boom, from the making of loans to the seizure of homes.
Under the terms of the Bank of America deal, the bank will pay Fannie Mae, the Federal National Mortgage Association, $3.6 billion and will also spend $6.75 billion to buy back mortgages from the housing finance giant.
The settlement will resolve all of the lender’s disputes with Fannie Mae, removing a major impediment to Bank of America’s rehabilitation. The bank had settled its fight with Freddie Mac, the other government-owned mortgage giant, in 2011.
Both Fannie Mae and Freddie Mac, the Federal Home Loan Mortgage Corp. - which have posted billions of dollars in losses in recent years - have argued that Countrywide misrepresented the quality of home loans that it sold to the two entities at the height of the mortgage bubble. Bank of America assumed those troubles when it bought Countrywide in 2008.
Before the latest settlement announced Monday, the Countrywide acquisition had cost Bank of America more than $40 billion in losses on real estate, legal costs and settlements, according to several people close to the bank.
By removing part of the bank’s mortgage weight, the move is a continued retreat from home lending by Bank of America, even as rivals including JPMorgan Chase and Wells Fargo compete for the profitable refinance business that has boomed with interest rates persistently low.
Bank of America also agreed to sell the servicing rights on about $306 billion worth of home loans to other firms. In separate statements, Nationstar Mortgage Holdings and the Newcastle Investment Corp. announced they were buying the rights. Those servicing costs, which were roughly $3.4 billion in the third quarter, have weighed on the bank’s profits, especially as borrowers fall behind on their bills.
Brian Moynihan, the bank’s chief executive, said in November that he intended to sell off about 2 million loans the bank currently serviced.
“Together, these agreements are a significant step in resolving our remaining legacy mortgage issues, further streamlining and simplifying the company and reducing expenses over time,” Moynihan said in a statement Monday.
Bank of America said it expected the settlement to hurt its fourth-quarter earnings by $2.5 billion because of costs tied to foreclosure reviews and litigation. The firm also expects to record a $700 million charge, an accounting move known as a debt-valuation adjustment, related to an improvement in the prices of its bonds.
The separate agreement with 10 banks on foreclosure abuses concludes weeks of negotiations between the federal regulators, led by the Office of the Comptroller of the Currency, and the banks. That settlement will end the troubled Independent Foreclosure Review, mandated by the banking regulators.
The deal, which was hashed out over the weekend, nearly collapsed after officials from the Federal Reserve demanded the banks pay an additional $300 million to address their part in the 2008 financial crisis, according to several people briefed on the negotiations who spoke on condition of anonymity.
The Federal Reserve, though, agreed to back down on the demands in the hope that the pact could move ahead and bring quicker relief to homeowners struggling to stay afloat in a time of persistent unemployment and a sluggish economy.
The multibillion-dollar foreclosure settlement was driven, to a large extent, by banking regulators, who decided that a review of loan files was inefficient, costly and simply not yielding relief for homeowners, these people said. The goal in scuttling the reviews, which were mandated as part of a consent order in April 2011, was to provide more immediate relief to homeowners.
The comptroller’s office and the Federal Reserve said Monday that the settlement “provides the greatest benefit to consumers subject to unsafe and unsound mortgage servicing and foreclosure practices during the relevant period in a more timely manner than would have occurred under the review process.”
The relief will be distributed to homeowners even if they did not file a claim for their loan files to be reviewed.
Concerns about the Independent Foreclosure Review began to mount within the comptroller’s office, according to the people familiar with the matter. The alarm, these people said, was that the reviews were taking more than 20 hours a loan file at a cost of up to $250 an hour. Since the start of the review, the banks, which are required to pay for consultants to review the files, had spent an estimated $1.5 billion.
The banking regulators said that the reviews were not providing any relief to borrowers or turning up meaningful instances where homes of borrowers current on their payments were seized, according to these people.
The settlement announce Monday is separate from a $25 billion settlement between 49 state attorneys general, federal regulators and five banks: Ally, formerly known as GMAC; Bank of America; Citigroup; JPMorgan Chase; and Wells Fargo.
Information for this article was contributed by Jessica Silver-Greenberg, Michael J. de la Merced and Ben Protess of The New York Times, Daniel Wagner of The Associated Press and Jesse Hamilton of Bloomberg News.
Front Section, Pages 1 on 01/08/2013