After a perilous Monday on Wall Street, there was more bad news for Bank of America: It announced disappointing earnings and cut its dividend as part of an effort to raise more capital. At the same time, though, Bank of America struck a deal with regulators that might help the economy. It's the boldest step by any bank to address the ongoing foreclosure crisis.
Bank of America's move comes as part of a settlement with state prosecutors. They had sued the mortgage giant Countrywide Financial for predatory lending. Bank of America now owns Countrywide. In settling the litigation, Bank of America agreed to make loans more affordable for about 400,000 homeowners.
"It is the first ever in the country mandatory loan-modification program, so it will require Bank of America to modify loans that Countrywide borrowers got into that were very risky and unfair loans," said Illinois Attorney General Lisa Madigan, who brought one of the suits against Countrywide.
'A Watershed Moment'
If someone who makes $30,000 a year bought a million-dollar home, the settlement won't help that homeowner. But a lot of people in danger of foreclosure could afford to stay in their homes if they had lower interest rates and/or a somewhat lower loan amount. So Bank of America agreed to drop rates as low as 2.5 percent for some borrowers and to forgive some debt. It also will suspend foreclosures while it looks at who can qualify.
"This is a huge deal — this is a watershed moment," said Mark Pearce, North Carolina's deputy commissioner of banks.
It may seem unfair to give people who made mistakes super low interest rates. But those rates will adjust back to market levels in coming years. And Pearce says it's in everybody's interest to try to stop this tsunami of foreclosures. It's driving down home prices and hurting the entire economy.
"We won't get out of the financial crisis we're in until we're able to stop the bleeding on foreclosures," he said. "Instead of addressing that problem, we allowed it to fester. And it has festered and now infected the whole of our global financial economy."
Pearce said restructuring people's loans can stop that bleeding. But the industry, before this settlement, had not done these so-called loan workouts in any kind of large-scale way — and that's a huge problem, he said.
"Eight out of 10 families with subprime and Alt-A [alternative documentation] loans are not getting any assistance at all when they struggle to make their mortgage payment. So there are a lot of people falling through the cracks," he said.
A senior manager at one of the major mortgage companies tells NPR that at that firm, maybe one in 100 people facing foreclosure are getting any kind of reasonable loan workout offer.
Bank of America manages more home loans than any other company, so this deal could mark a major shift.
"The scale of this is very unprecedented," said Bank of America spokesman Terry Francisco. "And certainly the experience we've had over the past year has lent itself to this, and so therefore we can step up significantly the efforts we've had in the past to keep homeowners in their homes."
One problem has been that even when lenders do a "workout," it doesn't go far enough to make the loan affordable.
Incentive To Homeownership
Bank of America is aiming to reduce payments for borrowers to make them just one-third of the borrower's income. Still, some housing advocates are skeptical.
"It is a step in the right direction, but it's not as big a step as one might think," said Bruce Marks, who leads the Neighborhood Assistance Corp. of America. He said the numbers sound good, but he's concerned that Bank of America has the option of putting homeowners into interest-only loans in order to reduce their payments. That means homeowners could still owe more than their houses are worth — and won't have much incentive to keep them.
"People will walk," Marks said. "The only way people will stay in a property that's worth less than what you owe is to make it a fixed-rate, fully amortizing loan, so people are invested in the property over the long term — that's true homeownership."
Still, the agreement clearly goes a lot further than anything the industry has done before. Prosecutors would like it to be a model for other companies.
Meanwhile, Bank of America is feeling the pain like many other banks. It announced earnings Monday that were much worse than expected; its profits were down 68 percent, due in part to the same kind of problem loans it's trying to sort out.