Countrywide & Bank of America Watch: The 11 State Attorney General Settlement in Context

Homeowner Relief? The Recent Countrywide Settlement in Context
A recent settlement between the California Attorney Generals office, joined by 10 additional states, resulted in one of the widest reaching predatory lending settlements in US history.
Under the landmark agreement, Countrywide Financial’s new owner, Bank of America, agreed to proceed with loan modifications on nearly $8 billion in home mortgages, potentially affecting hundreds of thousands of homeowners.
“With this settlement, homeowners will receive direct relief from the catastrophic damage caused by Countrywide,” said Attorney General Brown. “Countrywide’s lending practices turned the American dream into a nightmare for tens of thousands of families by putting them into loans they couldn’t understand and ultimately couldn’t afford.”
Tragically, California and the other states have had to step in because federal authorities shamelessly failed to even minimally regulate mortgage lending.”
According to the terms of the settlement, the loan modifications may include potentially lower interest rate fees along with certain principal reductions, depending upon the individual home owner’s agreement (see Bank of America Settlement /Attorney General Settlement)
According to the plan, the payments would be modified so that they will not exceed 1/3 of the mortgage holder’s adjusted income, after accounting for interest, taxation and insurance costs (¼ for those whose fees are not strictly escrowed according to the original terms of the loan.) For participating states, such as Illinois and California, homeowners will be eligible based upon meeting requirements, and will not have to pay restructuring fees and can get a temporary respite from pending foreclosure processes if they qualify.
While the program begins December 1, Bank of America has been positioning the agreement to help boost its public reputation, stating in a press release the “creation of a proactive home retention plan that will systemtically modify troubled mortgages” (see USA Today - B OF A Press Release)
The Bank went on to state that the settlement creates a “comprehensive program….to sustained home ownership.” Under the program, the Bank will consider options including Federal Housing Administration Hope for Homeowners refinancing, certain interest rate reduction plans and trades of home equity for reduced principal.
Banks have historically resisted lowering principal on home loans, but the swap for home equity satisfies bank’s concerns regarding the core value of the investment: when Bank of America takes a larger proportion of a smaller loan, they can potentially retain their investment, on net.
The settlement also created a “Foreclosure Relief” fund of $150 million for states to help home owners who can only afford minimal payments on their loans and an additional $70 million to help provide transition funds for those who have or will lose their homes through foreclosure. A large issue are Countrywide originated loans which were re-sold and packaged into securities to other banks and lenders - the press release states that just over 10% of eligible loans are held directly by Bank of America, leaving hundreds of thousands of home owners outside of the system vulnerable.
While the settlement covers loans that are managed by Countrywide, even if they originated from other lenders, it does not strictly cover all loans that originated from Countrywide but then we re-packaged and syndicated to other lenders, which became a common practice. As a result, you’ll want to check with your bank and your state attorney general’s office to determine whether you qualify for the loan settlement agreement.
While Bank of America states they will be contacting qualified homeowners, it’s best to reach out and see if you qualify in advance.
The effects of the settlement vary widely depending on the conditions of the loan. Although the modifications may help some homeowners, it cannot address structural problems that may still leave even adjusted rates out of reach for a growing number of homeowners.
Although critics credit Bank of America with an initial approach, many believe that is still does not go far enough and instead reflects both public and private financial pressures rather than representing a long term attempt to solve the problem. Many participating states believe that the agreement is just a first step in a larger scale modification with additional participating banks (see Washington Post)
While the Bank did not pay any fines to the government or admit any harmful actions on its part as part of the larger settlement, it did agree to what is considered one of the largest financial real estate settlements in recent years.
The suit really targets a small segment of loans which were addressed to the sub prime market with short-term, teaser interest terms that have become the target for recent scrutiny, leaving a much larger set of mortgage holders outside the direct reach of the settlement. Those with subprime or adjustable rate, pay option loans (option adjustable rate mortgages or ARMs) may see reduced interest rates under the settlement relative to the borrower’s income.
Regulators began to look at both the home owners who did not strictly fall within these guidelines, as well as the dozen or so major home lenders who did not take part in the settlement agreement (see Los Angeles Times)
Part of the settlement allows the Attorney Generals the right of first refusal on the settlement if Countrywide doesn’t reach more than 50,000 loan modification agreements before March 1, 2009, which is considerably lower than the nearly 400,000 loans which potentially qualify for the new terms.
Countrywide/B of A plans to begin contacting eligible borrowers starting December 1, although only those who are more than 60 days delinquent on their loan will receive first contact. Importantly, the settlement is still disciplined by profit potential on the part of the bank: only loan modifications that will produce revenue greater than or equal to what the banks could recoup directly through standard foreclosures will be considered, while those whose adjusted incomes are above the threshold for qualification also will not be offered modifications.
Given all of these details, you may wonder how exactly the settlement will affect your individual case – given the number of variables in play, each case will be evaluated individually by loan modification officers. To help you sort through some of these details, we have dissected some of the more intricate parts of the settlement. Always consult with an attorney or debt counselor before taking any specific actions.
What Homeowners Need to Know
Even if you quality for the settlement program, you will, generally, be notified starting on December 1. Independent of your qualifications, however, you still are obligated to make payments on your existing loan agreement until the modification fully goes into effect; as a result, you should always go forward assuming that you will have to make complete payments on the existing loan until you receive a firm modification offer (even after receiving an offer you should consult with a professional advisor to go over the details.)
Keep in mind that if your home is currently in foreclosure, the settlement does not reverse the procedure unless you meet the specific terms of the agreement - while you can consult the lender, they are not necessarily legally obligated to stop all foreclosure proceedings that have already begun, and are only suspending proceedings for those who meet the narrow terms as outlined in the agreement (this affects some 390,000 home owners, leaving many more outside of the scope.) As a result, you’ll have to contact a private attorney to help you navigate the individual details of your situation.
Keep in mind that loan modifications, under the settlement, are restricted to homeowners who are more than 60 days delinquent on their current subprime or pay option, ARM mortgages that are managed by Countrywide. If you have a loan with another lender, then your particular situation does not strictly apply to the settlement, and you will have to pursue the normal channels of working with your loan modification offices to reach a mutually acceptable agreement. Additionally, if you have another form of loan with Countrywide or if you originated your mortgage before 2004 or since the beginning of this year, then the settlement terms also will not apply in your case.
The equity of your home also plays into the equation: if you owe less than 3/4 of the current market value of your home, then the loan modification agreement also will not apply to your case. While this leaves out a large pool of borrowers, there are still other routes that you can take to reaching a new agreement, namely working with Countrywide on an individual basis to reach an agreement.
The exact terms of your modification will be determined by Countrywide as a product of the criterion they established to reflect both the income of the borrower, as well as the appraised value of the home relative to the principle amount. While most borrowers will be eligible for a reduced interest rate option or transformation of their loan to an interest-based mortgage over a shorter time period (generally, the conversions will be to five or ten year terms.)
The lowering of principle amounts is determined at the discretion of Countrywide, and is a function of the current market value of the home and your home equity position - only those who owe above 95% of the current home value might qualify (although home values can be subjective, Countrywide determines these based on 3rd party appraisals.)
Further, the exact interest rate reductions are determined by Countrywide, which can issue either temporary or permanent modification offers on interest - while some instances may provide temporary reductions at 3.5% or below, each case will be evaluated individually according to the agreement.
Keep in mind that the modification offer must be mutually agreed upon by both parties, and no fees can be levied under the terms of the settlement. If you are currently up to date on your loan, but anticipate financial pressures in the near future, then the terms of the agreement extend until June 2012 for those who qualify. (see California Attorney General News)
If you have already been through foreclosure proceedings, then you may qualify for compensation under the terms of the agreement. In particular, the agreement provides certain compensation amounts for those who qualify under the terms and have already been through proceedings may qualify for payments based upon a pool of compensation provided by Countrywide to the states (Attorney General offices expect to contact eligible individuals before the end of the year - you should contact your Attorney General’s office to determine the exact structure of this compensation.)
Although the loan modification offers will be applied nation wide, this compensation is only available to homeowners in states which participated in the settlement agreement which include California, Texas, Connecticut, Florida, Illinois, Iowa, Michigan, North Carolina, Ohio, Arizona and Washington.