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Ask Stacy: Will the $16B B of A settlement help me?

If you have a mortgage from Bank of America or Countrywide, you'll want to stay on top of this.

By MSN Money Partner Aug 26, 2014 12:38PM

This post comes from Stacy Johnson at partner site Money Talks News. 

 

Money Talks News on MSN MoneyLast week the Department of Justice announced the largest civil settlement ever from a single entity, an eye-popping $16.65 billion from Bank of America. The settlement arose from the handling of residential mortgages by Bank of America and subsidiaries Countrywide and Merrill Lynch.


Bank Vault © Radius Images, JupiterimagesHere's this week's reader question:

I just read about the B of A settlement and I'm wondering how it will affect people who had a B of A mortgage that was then sold to Countrywide? Will we see any monetary relief from this settlement or will it all go to pay off the lawyers and the fines? -- Beth

Let's look into what Bank of America did to deserve this unprecedented penalty and if American homeowners will see any of the proceeds.


To understand what B of A did wrong, you first have to wrap your mind around the basics of the American mortgage market. Not to worry: While it may sound mind-numbingly dull, how mortgages work is kind of interesting and not all that complicated.


How mortgage markets work

When you borrow money for a 30-year mortgage, you get a lump sum of cash now in exchange for agreeing to make monthly payments for the next 30 years. But the lender doesn't want to wait 30 years to collect its money and interest. If it did, it would soon run out of cash and be unable to make new loans.


Solution? Lenders make mortgage loans, then immediately turn around and sell them. The buyer is Wall Street, which packages loans into pools, then sells those pools as securities, aptly named "residential mortgage-backed securities," or RMBS. The mortgage-backed securities are sold to both institutional and individual investors. (You might even have some within a mutual fund in your 401(k) plan at work.)


Having an active market for mortgage loans allows a lender to give you money for a mortgage and recoup it by selling your loan. It’s then able to lend that same money again, benefiting the next homebuyer in need of a loan. The mortgage-backed securities that result provide investors worldwide with safe, diversified, income-producing investments.


In theory, everybody wins.


But there's a potential fly in the ointment. Those investing in mortgage-backed securities need to know that the mortgages they're buying are safe. They need to believe that lenders are carefully scrutinizing borrowers to be sure they can make their mortgage payments. They also need to know that if the borrower can't pay, the house securing the loan can be sold for more than the loan amount. These are the fundamentals that make these investments sound.


In short, in order for this system to work, lenders have to be careful whom they lend to. Because if too many borrowers default, investors in mortgage-backed securities get burned. And if they get burned, no more mortgage market.


Which leads us to B of A.


What Bank of America did wrong

A Department of Justice press release explains the allegations against Bank of America, Merrill Lynch and Countrywide Financial Corp. Here's an example:

Merrill Lynch regularly told investors the loans it was securitizing were made to borrowers who were likely and able to repay their debts. Merrill Lynch made these representations even though it knew, based on the due diligence it had performed on samples of the loans, that a significant number of those loans had material underwriting and compliance defects -- including as many as 55 percent in a single pool. 

In other words, Merrill Lynch knew it was packaging and selling mortgages taken out by borrowers unlikely to be able to repay their debts. But that didn't stop it from assuring investors the mortgage pools were safe.


Now all that's left is finding out where the $16.65 billion is heading.


Where's the money going?

Unfortunately, while the Justice Department did release some details of how the record settlement will be divided, there's not enough information yet to specifically answer Beth's question.


Here's what we know so far.


From the DOJ press release:

Of the record-breaking $16.65 billion resolution, almost $10 billion will be paid to settle federal and state civil claims by various entities related to RMBS, CDOs and other types of fraud.
Bank of America will provide the remaining $7 billion in the form of relief to aid hundreds of thousands of consumers harmed by the financial crisis precipitated by the unlawful conduct of Bank of America, Merrill Lynch and Countrywide. That relief will take various forms, including principal reduction loan modifications that result in numerous homeowners no longer being underwater on their mortgages and finally having substantial equity in their homes. It will also include new loans to creditworthy borrowers struggling to get a loan, donations to assist communities in recovering from the financial crisis, and financing for affordable rental housing.

So while borrowers like Beth may benefit, likely by a small amount, the details of exactly when, who and how much have yet to be announced. She'll have to watch the media, including this website, for updates.


Is Bank of America in trouble?

If you have money with Bank of America, you might understandably wonder if this spells the end of the banking behemoth. After all, there are probably countries that could be bankrupted by a $17 billion hit, much less companies.


But if you're worried about the solvency of Bank of America, fear not. According to Bloomberg, the day the settlement was announced, the stock went up as investors bet the bank will see rosier days. They're probably right. The same article predicts B of A will earn a familiar sum, $17 billion, next year alone.


More from Money Talks News

11Comments
Aug 26, 2014 1:24PM
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Send the bankers to jail! Yes put them in there with Manson and all the criminal gang members. That is where they belong. That is justice. A fine is an insult to the American people and only illuminates the total corruption between government and banks.
Aug 26, 2014 2:06PM
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Crazy..... and did anyone involved get any jail time for the fraud involved? Or is fraud legal for this type  business and it is catch me if you can?
Aug 26, 2014 2:10PM
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As a retired broker/appraiser, everyone was to blame in this mess. Loan brokers in order to keep their jobs had loan quotas to meet. Borrowers were using their home equity like a savings account. Everyone was dipping into this money pit. The borrowers, the banks, S&Ls, etc, the brokers (loan and RE), the title companies.,appraisers (you better make value or you never saw their business again). I knew the house of cards would soon fall.


Aug 26, 2014 2:00PM
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big banks are for people who have money to throw away to ceos
Aug 26, 2014 3:22PM
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Well, this may all fine and dandy for people who were "under water" with their mortgages, but it doesn't help those who were caught in Countrywide's "bait-and-switch" tactics.  When we got our original mortgage on our house, it was through Countrywide.  When we signed the papers, we had the option of paying a half of a percent more on the interest and have the option to pay out early with no penalties. We noticed a misprint as we reviewed the contract and so they went to reprint the papers with the correction.  Well, guess what?  The papers they brought back for us to sign had the early-repayment-penalty and the half-percent more interest included.  Of course, thinking they had just corrected the type-o, we signed the papers and it wasn't until we went to refinance the mortgage at substantially lower interest, we found out we had to absorb a $7,500 early-payment-penalty.  By that time, the mortgage had been sold to Morgan-Chase and we were stuck with the penalty.  It was a hard lesson to swallow, but my advice to anyone signing a contract of any kind - if they go to reprint something to make a correction, read the WHOLE thing again.  Since our mortgage was and still is significantly lower than the value of our house, and we have never missed or been late on a payment, there will be no benefit from them being fined either.  But, at least I can say, "IT SERVES YOU RIGHT, B of A AND COUNTRYWIDE, YOU DESERVE IT"!
Aug 26, 2014 2:48PM
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principal reduction of the loan is an income to you, babe  :) IRS is waiting good luck..
Aug 26, 2014 6:26PM
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Just for the record, and something the author conveniently left out, BofA did not own Merrill-Lynch or Countrywide until after the loans the article mentions were made.  BofA bought up Merrill-Lynch when it was on the verge of bankruptcy in 2008.  All of those toxic loans were on Merrill's books when BofA took over.  When BofA found out about it, after the fact, they wanted out of the deal.  But, the Treasury, meaning Hank Paulson, refused to let them out of the deal.  BofA is essentially being fined for something that it didn't do.  
Aug 26, 2014 6:40PM
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ask STACY ; ;  ...question ... should i invest in cigars...or just steal them because i feel intitled...
Aug 27, 2014 5:28PM
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at the end of the day, it will help very few.   Will in many cases reward bad behaviors. Government cashing in on blaming the Banks for its flawed affordable housing legislation which set all this in motion. The legislation gave everyone the right to own a home. Even those not qualified.  Homeownership is something you work for after you've saved a down payment and established good credit. Government has yet to take any responsibility for this and has simply blamed the banks and turned the masses against the banks. I'm an ordinary average client of a few banks and they have always been fair with me.
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