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Bank of America To Modify Mortgages From Countrywide
Bank of America hammered out the agreement with several states that accused Countrywide of deceptive predatory lending practices. The attorneys general in California, Florida and Illinois had initiated lawsuits and took the lead in negotiating.
Tom Miller, Iowa's attorney general, said Bank of America started talking to the states in July about yesterday's agreement. He said the settlement could serve as a role model for other loan-modification programs because it is wide and systematic.
Under the deal, the first-year payments of principal, interest, taxes and insurance will be targeted to equal 34 percent of the borrower's income, or 25 percent of income for borrowers for whom taxes and insurance are not escrowed.
"This has the potential of being a game changer," Miller said. "We're not sure until we see how it works."
The modification plan is more aggressive than the one recently started by the Federal Deposit Insurance Corp. after it took over California-based IndyMac and decided to restructure 25,000 loans, said Benjamin Diehl, a California deputy attorney general.
For instance, the FDIC deferred principal payments on option adjustable-rate mortgages, whereas Bank of America agreed to permanently lower the principal on those loans, Diehl said. Borrowers can also get an interest rate reduction on top of that.
In the recent past, consumer advocates have railed against lenders for promising under pressure to modify loans but doing nothing.
Jerry Brown, California's attorney general, said this settlement will be closely monitored and enforced in the months ahead.
"We will be on it," he said.
Brown's office described the settlement as the largest in a predatory lending case, dwarfing a $484 million settlement with Household Finance Corp. in 2002.
Bank of America did not admit any wrongdoing and was not required to pay any fines.
Although the bank reported yesterday that losses on bad loans are dragging down its profit, the cost of this program was covered by money the bank already accounted for when it purchased Countrywide, according to Joe Price, the bank's chief financial officer. "The cost of restructuring these loans is within the range of losses we estimated," he said in a statement.
Guy Cecala, publisher of Inside Mortgage Finance, said the settlement makes financial sense for Bank of America. If about 20 percent of these troubled loans went into foreclosure, which is the going industry rate at this point, Bank of America would be faced with $22 billion in losses, Cecala said.
As of yesterday, 12 states had joined the settlement and others have the opportunity to do so. Those states that participate will receive a share of $150 million set aside for foreclosure prevention efforts and $70 million to ease the transition of people who are losing their homes to foreclosure.
Countrywide customers can call 800-669-6607 for more information.