Bank of America in $8.4 bln settlement to aid mortgage holders

Oct.06, 2008 in Market Outlook

TEL AVIV (MarketWatch) — Bank of America and a number of U.S. states reached an
$8.4 billion accord under which the banking giant will modify troubled mortgages
and enable nearly 400,000 Countrywide Financial Corp. clients to keep their
homes.

Bank of America acquired Countrywide on July 1. The program is designed to
resolve claims that several state attorneys general had filed against the
Calabasas, Calif., mortgage firm.

The program’s goal, Bank of America said in a statement, is to enable borrowers
who financed their homes with subprime loans or pay-option adjustable-rate
mortgages to hang on to those homes.

For B of A, “the cost of restructuring these loans is within the range of losses
we estimated when we acquired Countrywide,” Bank of America Chief Financial
Officer Joe Price said in a statement.

The plan will reduce interest and principal on the mortgages by $8.4 billion, the
Charlotte, N.C., banking giant (BAC) said.

The program applies to mortgages serviced by Countrywide and originated before
Dec. 31, 2007.

The target borrowers are those who occupy their homes as their principal
residences and “who are seriously delinquent or are likely to become seriously
delinquent as a result of loan features, such as rate resets or payment recasts,”
Bank of America said.

Option ARM mortgages enabled borrowers to pay only minimal amounts at the start
of the loans. But those initial payments often didn’t cover even the interest
that was due, and the loan balances then ballooned.

By Dec. 1, Countrywide staff will begin contacting eligible customers. B of A
said it would not begin or advance a foreclosure sale for a borrower who is
likely to qualify for the program until Countrywide decides whether the borrower
is indeed eligible.

How will Bank of America ensure that the mortgage workouts will keep people in
their homes?

One method, the bank said, is to ensure that first-year payments of principal,
interest, taxes and insurance will equal 34% of the borrower’s income. The
modified loans’ interest rates will adjust with “minimal risk of payment shock
and redefault,” Bank of America said.

The bank said it would modify the loans via a number of methods, including:

B of A said Countrywide wouldn’t charge the borrowers any fees to modify the
loans, and it will waive prepayment penalties for subprime and pay-option ARM
loans.

The bank also will lay out $150 million to help Countrywide customers who are
already in foreclosure or are at serious risk of foreclosure. And it will pay as
much as $70 million to help Countrywide customers who’ve lost their homes to make
the transition to other living arrangements.

States that are likely to sign the agreement include Arizona, California,
Connecticut, Florida, Iowa, Illinois, Michigan, North Carolina, Texas and
Washington, a Bank of America spokesman told The Wall Street Journal.

States that haven’t joined the program will have the opportunity to do so, Bank
of America said.

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