LOS ANGELES, CA - An estimated 400,000 Americans who are struggling with risky mortgages from Countrywide Financial Corp. can get their loans modified and payments reduced under a program to be announced today. In a pact that could save mortgage holders billions of dollars, Countrywide owner Bank of America Corp. has agreed to the nation's largest loan-modification program to settle charges of lending abuse brought by at least nine states. The program would examine nearly 400,000 loans across the nation to see if they could be reworked to be more affordable.
But officials acknowledged that some borrowers are beyond help and said they would need the cooperation of investors who own the loans, assistance not always forthcoming in the past. The program, to be announced in California today by state Attorney General Jerry Brown, applies to mortgages made before this year. It had been endorsed by at least nine states as of Sunday, including California, Florida and Texas, where Countrywide wrote the most loans.
Its central thrust, changing the terms of subprime and other risky loans, was to be applied across the country, even in states that might not accept the overall settlement, California and Bank of America officials said. "It's not perfect," Brown said Sunday, "but we have some money for people who already have been kicked out of their homes, and we have money for people who may get foreclosed on later. And there are some very significant payment reductions for people this will allow to stay in their homes."
According to Brown's office, the settlement could save borrowers up to $8.7 billion nationwide, and $3.5 billion in California alone, nearly all of it through interest rate and principal reductions. That estimate assumes that all eligible borrowers participate and that investors in mortgage securities cooperate wth the loan workouts.
Those are big ifs, said Robert Gnaizda, general counsel of San Francisco's Greenlining Institute, a leading fair-lending advocate. "There's no way of saying how much borrowers are going to save on this. The talk of $8 billion is pure speculation," Gnaizda said after reviewing a description of the plan. "All that being said, I believe this is a very important first step."
The agreement almost certainly would rank as the largest predatory lending settlement in history, dwarfing the nationwide $484 million settlement with Household Finance Corporation in 2002 and a $325 million settlement with Ameriquest Mortgage Co in 2006. Those settlements involved payments to borrowers, however, not loan modifications. Bank of America officials said the settlement costs would not exceed those anticipated when it acquired Countrywide in July for $2.5 billion in stock.
While numerous lawsuits and federal investigations continue against Countrywide, former Chairman Angelo Mozilo and other former executives, the settlement helps Bank of America shed liability for the aggressive lending that helped trigger the global financial crisis and left hundreds of thousands of American stuck in loans larger than the value of their homes.
Under Bank of America ownership, Countrywide has stopped making the types of adjustable-rate loans that caused the most problem, officials said. According to the agreement, borrowers assisted by the loan workouts would not be precluded from joining in private class-action lawsuits against Countrywide or pursuing their own claims. Barbara Desoer, president of Bank of America's mortgage and insurance operations, said: "We are confident that together with the attorneys general we have developed a comprehensive program that provides more solutions than ever before to assist troubled borrowers and put them back on the path to sustained home ownership."
The states of California, Illinois and Florida took the lead in the settlement, said Benjamin Diehl, a California Department of Justice attorney specializing in lending abuse. The three states had sued Countrywide and its subprime unit, Full Spectrum Lending, in June, alleging they maximized short-term profit by deceptively marketing risky loans with low starter rates to borrowers who didn't understand that their payments would one day "explode." Diehl said the program will "streamline" modifications to subprime mortgages whose huge defaults have played havoc with global financial markets.
Bank of America said Countrywide mortgage servicing employees would be trained for the program by Dec. 1, and would then begin reaching out to eligible customers. The plan includes a freeze on foreclosures for borrowers likely to qualify until Countrywide has determined the borrower's eligibility, the bank said. The program will first identify customers who have fallen behind on their mortgages by more than 60 days or are likely to do so because of loan features such as rate or payment increases, Diehl said. These customers will be contacted by Countrywide employees starting Dec. 1, Bank of America said.
Various options will be considered for eligible customers, with employees handling the workouts instructed to first consider a refinance into a fixed-rate Federal Housing Administration loan, Diehl said. The options on subprime mortgages also include keeping the initial rate for five or ten years, having the borrowers pay interest only, and reducing the interest rate to as low as 3.5 percent, Diehl said.
For pay-option loans, many of which are now for more than the borrowers' house is worth, the options include writing the principal down to 95 percent of the current appraised value and also lowering the interest rate to 3.5 percent, Diehl said. In addition to California, Florida and Texas, the states that had signed the settlement Sunday included Connecticut, Washington, Arizona, Ohio, Illinois and Iowa.
Source: Los Angeles Times