At first glance, the numbers look impressive. Bank of America Corp. last week agreed to pay $11.6 billion for selling the government toxic mortgages; 10 banks ponied up $8.5 billion to federal regulators for foreclosure abuses. But viewed against the scale of the financial meltdown, the feds’ most recent deals with financial-industry giants look to some more like a slap on the wrist.
It’s all part of the government’s push-and-pull with banks, where regulators are both determined to punish wrongdoers, but also tasked with promoting stability in the financial markets. The result is a pair of imperfect settlements that look good mainly when compared with other, even more flawed compromises, such as Freddie Mac’s deal with BofA two years ago for far less money.
“To the banks, this was a pittance,” said Hugh Totten, a partner in Chicago’s Valorem Law Group who was not involved in the settlement but whose practice includes foreclosure litigation. “The problem is so big and the government is so incapable of knowing how to value” the remedy.
Federal regulators have struggled with how to value the losses stemming from shoddy mortgages that lenders sold to Fannie Mae and Freddie Mac, which have received more than $160 billion in taxpayer funds to remain solvent. Last week’s BofA settlement fell far short of the $1.4 trillion Fannie took on in unpaid mortgages from the bank between 2000 and 2008. But it’s a huge increase from a settlement struck two years ago by BofA with Freddie Mac. Freddie received $1.28 billion.
“It’s looking like Freddie left a lot of money on the table compared to Fannie,” said David Min, a professor at the University of California, Irvine School of Law, who specializes in financial-markets regulation.
While the deals involved different pools of mortgages, Min noted that Fannie and Freddie are “similar entities…but it seems as if Fannie discovered claims worth 10 times what Freddie’s claims were worth.”
Both Fannie and Freddie require lenders to “represent and warrant” that the loans they buy comply with their underwriting standards —that is, the buyers are creditworthy and the property meets eligibility requirements. If it turns out that the loans don’t meet the standards, then the enterprises can require the lenders to repurchase them at full face value or indemnify them for any losses incurred.
Under last week’s settlement, BofA agreed to repurchase 30,000 defective loans from Fannie for $6.75 billion. The bank, represented by Wachtell, Lipton, Rosen & Katz partner Meyer Koplow, also agreed to make a cash payment of $3.55 billion to Fannie and to pay another $1.3 billion to address loan-servicing issues, for total penalties of $11.6 billion. Koplow declined comment.
BofA head Brian Moynihan in a statement called the settlement “a significant step in resolving our remaining legacy mortgage issues.”
Fannie was assisted by Dechert partners Barton Winokur and Mauricio España. Winokur referred a request for comment to Fannie. In a statement, Fannie’s general counsel, Bradley Lerman, called the deal “in the best interest of taxpayers.”
Tale of Two Settlements
It wasn’t the first time Fannie has come after BofA for repurchase claims: In late 2010, Fannie reached a $1.52 billion deal with the bank to repurchase about 18,000 loans.
At the same time, Freddie settled claims covering 787,000 loans for $1.28 billion. But there was a key difference. Freddie’s deal included a provision “releasing Bank of America and its two affiliates from existing and future repurchase claims,” according to Freddie’s Form 8-K filed with the U.S. Securities and Exchange Commission.
Freddie’s then-general counsel, Robert Bostrom, now a partner at Greenberg Traurig, did not respond to a request for comment and a Freddie Mac spokesman declined comment.
Fannie’s original deal contained no such concession, leaving the door open to future claims (last week’s settlement, however, does ban additional claims down the road). Notably, Timothy Mayopoulos, who is now Fannie’s CEO, was general counsel at the time, having joined the enterprise after serving as general counsel of BofA.
In 2011, the inspector general of the Federal Housing Finance Agency, which serves as Fannie and Freddie’s conservator, blasted Freddie’s settlement, saying the deal could have shortchanged taxpayers billions of dollars—a report that now looks prophetic, given Fannie’s settlement.
Last week’s other settlement—$8.5 billion deal by 10 banks over foreclosure-abuse claims—also drew fire from consumer advocates, who argued that homeowners were left out in the cold while lenders faced minimal consequences.
Barry Zigas, the director of housing policy for the Consumer Federation of America, called the deal “inadequate” from a consumer perspective.
“In its scale and scope, given that individual consumers potentially lost their homes, it’s not very much to compensate them,” said Zigas, who is a former senior vice president for Fannie Mae and he is now a member of BofA’s national consumer advisory council.
Still, Zigas said both settlements could help restore consumer confidence in the mortgage process.
“From a consumer point of view, the hope is that through this kind of effort to hold lenders accountable, we will hopefully see that consumers will be able to approach the market with a higher degree of confidence that they are getting the best mortgage they deserve,” he said.
As part of the foreclosure-abuse agreement, the banks and lending institutions will fork over $3.3 billion in payments to eligible borrowers and $5.2 billion in the form of loan modifications and forgiveness of deficiency judgments.
Included in the settlement with the Office of the Comptroller of the Currency and the Federal Reserve Board are Aurora Bank FSB, Bank of America, Citibank, JPMorgan Chase & Co., MetLife Bank, The PNC Financial Services Group Inc., Sovereign Bank, SunTrust Banks Inc., U.S. Bancorp and Wells Fargo & Co.
In a statement, Comptroller of the Currency Thomas Curry said the settlement, which stems from an April 2011 enforcement action, meets the objectives of the Independent Foreclosure Review process “by ensuring that consumers are the ones who will benefit, and that they will benefit more quickly and in a more direct manner.”
The office initially set up the review process to allow foreclosed homeowners to request an independent review of their foreclosure and then dole out funds on an individual basis.
The settlement abandons the review process, which critics said hampered homeowners’ access to funds. The New York Times reported last week that consultants raked in more than $1 billion, detailing waste and abuse on the part of so-called independent experts in the review process.
“All of us were very frustrated with the [Independent Foreclosure Review] process and its shortcomings,” Zigas said. “It was not meeting the intended goals, and I can understand the desire to find a quicker path to resolution.”
The Federal Reserve said in a statement that the eligible borrowers should be contacted by a payment agent by the end of March and that they would receive compensation regardless of whether or not they filed for review. According to the release, the settlement will help some 3.8 million borrowers whose homes were foreclosed upon in 2009 and 2010, with compensation ranging from hundreds of dollars up to $125,000.
Elizabeth Renuart, a professor at Albany Law School, said it’s still hard to assess the settlement until more details are available, but she was skeptical about how the money will be apportioned.
“$8.5 billion divided by 3.8 million borrowers—the math there is not impressive. What they’re doing now with the settlement is changing the rules of the road,” she said. “It will no longer be a remedy for those who applied, but a settlement to limit the amount of damages that these banks and companies would have to pay out or give credit for.”
Federal regulators likely were eager to settle the matter, said Peter Henning, a professor at Wayne State University Law School.
“I think the government wants to be done with this,” he said. “They put a bow on it and said, ‘Yeah, we’re done. Pay your money and move on,’” adding, “We need to cross our fingers and hope the banks have learned their lesson, but I don’t think they have.”