The Department of Housing and Urban Development (HUD) has reached a settlement with Bank of America, which releases the company from liability for failing to provide alternatives to foreclosure on 57,000 delinquent government-insured mortgages.The agreement, a draft of which was obtained by American Banker, was previously undisclosed. It has been forged on a separate but parallel track from ongoing settlement talks between BofA, state attorneys general and other regulators over alleged mortgage origination and servicing failures.
BofA's pact with HUD requires it to waive a minimum of $10 million in unpaid mortgage payments and vet each of the 57,000 delinquent borrowers for a possible loan modification, short sale or other foreclosure alternative.
"Our total costs for the program will be multiples of that" $10 million minimum, said bank spokesman Dan Frahm. The deal calls for mesure to "ensure these customers have every opportunity to stay in their homes," he added.
Following such outreach, the settlement paves the way for BofA to foreclose on homes which borrowers could not afford even after a mortgage modification and those that have been left vacant by owners.
In forging the agreement, HUD decided to forgo steep monetary damages or admissions of error from the bank.
Instead, it pushed for the lender to implement steps that in most cases it was supposed to have already taken under the terms of its Federal Housing Administration (FHA)-guaranteed loans, with the apparent aim of minimizing foreclosures and related insurance claims.
"We took the borrowers into account first," said HUD general counsel Helen Kanovsky. "We think that that's really the best thing for the FHA [insurance] fund as well."
The agreement is HUD's first involving settlement of claims in which a servicer failed to offer loss mitigation to borrowers. It does not, however, prevent HUD from seeking damages from BofA for unrelated origination and servicing failures.
"We fought for as narrow a [legal] release as possible and as much money as possible," HUD's Kanovsky said.
Under HUD's standard terms, borrowers must be less than 12 months delinquent to qualify for loan modifications. With the BofA settlement, the minimum of $10 million the bank agreed to pay will go to covering past-due arrearages and giving borrowers more than a year behind the possibility of qualifying for foreclosure alternatives.
The agreement was signed by Bof A senior vice president Robert Gaither on July 11, who directed queries to a company spokesman.
The 57,000 borrowers covered by the agreement, all of whom are 12 to 24 months delinquent, represent 4% of the total 1.5 million FHA loans that BofA services, but a substantial of the company's seriously delinquent loans. BofA holds $19.8 billion in FHA-insured loans that are 90 days or more delinquent, and another $3.1 billion in FHA loans between 31 and 89 days delinquent, the bank said in its second-quarter earnings release.
Under its terms with HUD, BofA will have to pay to review its modification work an independent monitor who will report to HUD. It is also obligated to seek borrowers via database searches, letters, phone queries and visits to properties. Borrowers who fail to qualify for loan modifications, will receive from BofA $4,000 for a short sale and $7,500 for a deed-in-lieu of foreclosure that lead residents to vacate properties.
The deal reflects the high levels of financial uncertainty surrounding such negotiations. In May, BofA agreed to pay $20 million, or double the minimum for the latest settlement, for improperly foreclosing on a relatively few 160 homes of military service members.
The settlement is "not a lot of money for the potential losses that the federal government may have to make good on," according to Diane Thompson, an attorney for the National Consumer Law Center.
The minimum $10 million payment of borrowers' arrearages is unlikely to defray the FHA's losses on foreclosures, she said.
But if BofA is "able to identify the loans, and if people are still in the homes, and if they waive payments over past 12 months, then that's more valuable than a big fine for Bank of America," Thompson said. "But there are a lot of ifs there."
The largest banks hold billions of dollars of delinquent FHA loans on their balance sheets for which they have not yet filed claims. This may be due to concerns that they may have violated stringent HUD servicer requirements and could be held liable for treble damages related to false claims. One sticking point in settling such claims is that the FHA requires all servicers to have employees conduct face-to-face interviews with FHA borrowers once they become 60 days delinquent, a procedure most servicers either did not undertake or cannot document.
As part of the deal HUD has also agreed to pay any mortgage insurance claims and waive any pending administrative actions against BofA, its officers, directors or employees "in connection with servicing or loss mitigation deficiencies." The only exclusion is for allegations involving improper transfers of titles.
BofA also has agreed not to claim expenses on any FHA insurance claims for taxes, liens or property preservation incurred from November 2010 through July 2011.