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BoA Nonesense

posted by Adam Levitin

The irony of the CEO of Bank of America kvetching that it would be unfair to responsible homeowners for the bank to give principal reductions to homeowners in default is really too much. Does he recall that he's the CEO of a bank that is only still in business by grace of a federal bailout?

But where is Moynihan getting that he'll be required to help only deadbeats, when he feels morally bound to share the love with current borrowers?  I sure didn't see anything in the AG/CFPB term sheet that requires that.  Instead, it leaves the question of who will live and who will die up to the banks, precisely so they can't bellyache that federal regulation is restricting their ability to do loan mods, as they have about HAMP.  

Here's the relevant language from the term sheet.  As far as I can see, the basic principle for mods is NPV maximization (i.e., investor protection).  Default status surely plays a role in that calculus, but it's the servicer's decision how to account for that: 

  • "Servicers employees shall not advise, instruct, or recommend that borrowers go into default in order to qualify for loss mitigation relief."  (p. 17)
  • "Servicer shall consider and apply principal reductions in appropriate circumstances for sustainable modifications." (p. 18) 
  • There is a particular requirement that servicers evaluate all defaulted loans with an LTV>100% or CLTV>115% for principal mods in a particular manner, but that's not saying only defaulted loans are eligible for principal mods. (p. 18)

My read here is that Moynihan's real complaint is that BoA might have to dish out $4-5B (relative to earnings of $35-40B, it's not so huge, even if it is is the largest bank fine ever by an order of magnitude) and leave the AGs and CFPB with the ability to hammer it for noncompliance.  (And again, I emphasize that the AGs and CFPB do not currently have authority over things like noncompliance with HAMP or PSAs, but would under the term sheet, meaning there would be a real cop on the beat).  

Comments

Good insights Adam and I couldn't agree with you more about Moynihan's real complaint. I enjoy reading your posts and thanks for putting in the time it takes.

Additionally...I thought the servicer's responsibility was _supposed_ to be maximizing value for the investor (in this case, the trust), not being the moral hazard police.

Mr Levitin,

What about the fact that any Modification must consider the likelihood of re-default of the borrower as a part of the calculation? For most homeowners, the likelihood of re-default is considerable, without principal reductions far below FMV. So, to make those reductions, it means that the borrower would fail the NPV test.

Furthermore, if you make modifications of loans to homeowners who will re-default again, and then factor in the losses to Investors, the homeowner again fails the NPV test.

But, foreclosure defense advocates conveniently ignore these facts.

Regardless of Moynihan's motives, the favoring of non-paying mortgagors vs paying mortgagors was what got the Tea Party started - if you remember, the CNBC guy's rant that used the Tea Party metaphor was in response to exactly that. So should the regulators insist on it, I suspect it is going to generate much controversy again.

Go for it... The faster we can undo what remains of integrity, personal responsibility and good morals in the U.S. the faster we will hit bottom. Russia's corruption and fraud will seem like child's play after this country purposely changes in 5 years what it took hundreds of years to build. As it is I spend 2 hours a day researching possible new careers in fraud and corruption. The latest may be house flippers. In 2 weeks time I can get a Realtors license, join an illegal foreclosure group on the steps of the court house and start flipping properties for 40% return compliments of FHA and 3% down. Does not matter 80% of the folks buying now will all be underwater in a year or two. The taxpayer will bail the next round out to.

Like I said the faster this country can become fully corrupt the better it will because then it will be fair across the board. You know the old saying "If You Can't Beat 'Em, Join 'Em" It can only work if we are all corrupt and unfeeling with no morals. That is the future of American and the sooner I find a "gaming" opportunity the faster I will beat the rest of America.

Love the spirited comments and appreciate the post.

It is indeed true, that it is a little bit unfair to those responsible homeowners for the bank to give principal reductions to homeowners that are earning less. But, still, those responsible ones will still benefit on it. This reduction does not mean that those less earning homeowners will not be forced to pay their obligation, they will still pay it. Glance for a while http://www.mortgagecomplianceadvisors.com/

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