Late last month, Bank of America, one the nation’s largest mortgage servicers, entered into a settlement agreement with multiple investors, in what has been hailed as one of the most significant settlements involving mortgage-backed, toxic assets since the onset of the financial crisis. At $8.5 million, the settlement, at least on its face, seems to present an optimistic message for investors, who can now maintain some measure of hope that legal remedies exists for the opaque, sometimes fraudulent securities on which they spent their money.
But a closer look at the agreement reveals a different picture. While $8.5 million may be a convincing figure to some, the value of the mortgages held by the Bank of America totals at about $172 million, meaning that Bank of America secured a deal in which they were obligated to pay back less than five cents on every dollar. This statistic has prompted many, including New York Attorney General Eric Schneiderman, to demand more information about the settlement. Schneiderman and other critics suspect that the deal was put together hastily and unfairly: the New York Times reports that the investors involved in the settlement hold interest in merely one quarter of the 172 million in assets. Moreover, because of the legal parameters of such a settlement, the deal would have a comprehensive effect, foreclosing claims from investors and individuals that may hold interest in the BoA loans but were not privy to the settlement negotiations.
More specifically, the settlement involves loans held by a BoA subsidiary, Countrywide Financial, which BoA purchased in late 2008 under what was apparently a disaster mitigation circumstance. While BoA has every incentive to get rid of the Countrywide loans, given their toxicity and total lack of profitability, they neglect to consider the far-reaching policy effects that the deal will have. Most conspicuously, the settlement will almost certainly accelerate foreclosure processes, which will impose devastating consequences on families. These foreclosures will have broader economic ramifications. According to Times columnist Paul Krugman, the settlement:
“would just accelerate foreclosures, and if more families were evicted from their homes, that would mean more homes offered for sale — an increase in supply. An increase in the supply of a good usually pushes that good’s price down, not up. Why should the effect on housing go the opposite way?”
Indeed, as Krugman writes, this settlement presents yet another example of letting bankers of the hook. Furthermore, the Countrywide mess and the subsequent short sale of the firm to BoA indicates the crucial need for greater regulation of asset-backed securities, the danger of which is now well documented. The deal will certainly affect our job at here at St. Ambrose, where our foreclosure prevention team negotiates with banks everyday in an effort to stymie foreclosures. Settlements like this one set a precedent of “going easy on the banks,” as Krugman writes, enabling them to feel that they are beyond legal remedies for honest negotiation. Such settlement will, in other