Bank of America will provide deeper-than-anticipated principal reductions for about 200,000 homeowners under newly disclosed terms of last month’s foreclosure settlement with state and federal authorities.
The cuts for homeowners who owe more than their homes are worth could total more than $100,000 each under the deal with the government, according to Dan Frahm, a spokesman for Bank of America. Bank of America hopes it will be able to reduce what it owes in penalties under the settlement by up to $850 million.
The $26 billion settlement was announced last month by 49 state attorneys general, as well as officials from the Department of Housing and Urban Development, the Department of Justice and other federal agencies.
The principal reductions for the affected Bank of America customers will likely be deeper than the broader group of distressed homeowners covered by the settlement.
The details of the separate deal, which were first reported by The Wall Street Journal, are expected to be included in court documents as part of the settlement that could be filed as soon as Friday.
As is the case with the broader settlement, mortgages owned by government-sponsored entities like Fannie Mae and Freddie Mac, as well as those backed by the Federal Housing Administration and the Veterans Administration, will not be eligible for principal reductions.
Instead, the benefits will go toward mortgages owned by Bank of America or serviced by Bank of America for private investors. Furthermore, eligible borrowers will have to fulfill a number of other conditions, including being 60 days or more overdue and have a loan whose unpaid balance exceeds the value of the house.
In addition, Bank of America is temporarily halting foreclosure sales of homes that could be covered under the settlement, until it has time to solicit potential beneficiaries. Bank of America is the nation’s second-largest mortgage servicer after Wells Fargo, and has been severely criticized for its handling of foreclosure cases.
Most of the loans covered in the deal will be mortgages originated by Countrywide, the giant subprime lending specialist Bank of America bought in 2008. That deal has already cost Bank of America more than $30 billion, and depressed its stock because of fears that Bank of America would have to pay billions more to compensate investors who hold the soured mortgages.
The $26 billion settlement grew out of an investigation begun in late 2010 by state attorneys general into allegations of abuses as part of the foreclosure process. Those abuses included the banks’ approval of documents with only cursory reviews, a practice known as robo-signing.
The bulk of the broader $26 billion settlement, about $20 billion, would go to a million American homeowners who would have their mortgage debts reduced or their loans refinanced at a lower interest rate. It also includes $1.5 billion for about 750,000 people who lost their homes to foreclosure between 2008 and 2011, with each receiving between $1,500 and $2,000.
As a result of the settlement, state and federal authorities will not be able to sue the banks for possible misdeeds, like robo-signing, directly linked to servicing.
The extent of the errors that took place prior to millions of foreclosures remains a hot issue, with banks insisting few if any homes were foreclosed upon improperly, even if errors were made along the way. But a report expected as early as Friday by the inspector general of the Department of Housing and Urban Development is likely to find a broad pattern of mistakes, and it could ignite fresh outrage toward the banks, according to government officials briefed on the report.
The amounts from individual banks in the $26 billion accord were linked to their share of the servicing market. The biggest, Bank of America, would provide $11.8 billion, followed by $5.4 billion from Wells Fargo, $5.3 billion from JPMorgan Chase, $2.2 billion from Citigroup and $310 million from Ally.
And if nine other major mortgage servicers join the pact, a possibility that is now under discussion with the government, the total package could rise to $30 billion.