Nearly six years after the start of the financial crisis, the White House says that justice is really, finally, truly being served.
“This historic resolution—the largest such settlement on record—goes far beyond ‘the cost of doing business,” Attorney General Eric Holder said in a statement announcing last week's $17 billion settlement with the Bank of America over toxic mortgage securities.
"Under the terms of this settlement, the bank has agreed to pay $7 billion in relief to struggling homeowners, borrowers and communities affected by the bank’s conduct. This is appropriate given the size and scope of the wrongdoing at issue," he concluded. It's the third major settlement that the Obama administration has reached with a Wall Street bank over the financial crisis, following similar agreements with Citigroup and JPMorgan Chase.
But is the settlement really as large and meaningful as the administration claims?
The settlement's $7 billion consumer relief package accompanies nearly $10 billion in fines, as well as a formal admission from the bank that it knowingly misled the government and the public about the value of toxic mortgage securities.
But Bank of America isn't providing $7 billion in hard payments directly to consumers who've been wronged by the crisis. Instead, the settlement will count various activities towards that $7 billion total. And in many cases, the bank will get credit for more than the face value of the relief it's providing; in some cases it will get less. For example, loan modifications for struggling homeowners are one of the biggest parts of the consumer relief package. If the bank provides principal forgiveness to homeowners before May 31, however, it will get $2.00 in credit for every $1.00 forgiven.
At the end, "if they do everything right, it will cost them something less than $7 billion," says Eric Green, a Boston lawyer at a dispute resolution firm who's been chosen to be the independent monitor for the Bank of America settlement. Green is tasked with ensuring that Bank of America complies with the settlement, but he is not responsible for deciding where the money goes. "It’s not $7 billion of punishment to the bank. People who want to extract punishment from the bank looking for something different. What this provides is value and benefit to consumers," he says.
The enhanced credits, in fact, are meant to address concerns that banks were far too slow in delivering help to struggling homeowners through the 2012 national mortgage settlement, which Bank of America and four other banks agreed to over shoddy foreclosure practices. The latest settlement also includes requirements to develop affordable rental housing and fund foreclosure prevention counseling. As David Dayen points out in the Guardian, it also gives the bank credit for activities that might help rebuild the housing market but aren't directly related to the victims of the foreclosure crisis, like demolishing abandoned homes and making loans to first-time, lower-income homebuyers.
Bank of America has until 2018 to comply with the settlement, but carrying out the relief sooner than later "will save them hundreds of millions," says Green. "It uses self interest and market forces to build in incentives for the bank to do this, which is much better than commanding or directing to do this," he says. There are also incentives to make more generous loan modifications and to lend to families who've already been foreclosed upon.
Bank of America promises that it will "deliver as much as relief as possible in the first year," according to spokesman Dan Frahm. "We understand the urgency of solutions for many customers in need of assistance," he said. But unless Congress acts soon, those who receive mortgage assistance will have another financial burden to carry: As a 2007 mortgage relief law expired in December, they will owe taxes on the loans that were forgiven. The settlement includes some tax relief, but it won't be enough to cover the entire burden, the Justice Department says.
Paul Leonard of the Center for Responsible Lending believes that the Bank of America agreement is an improvement over previous settlements for encouraging more generous loan modifications—and doing more to force banks to direct aid to where it's needed the most.
"One of the big problem with the National Mortgage Settlement was that it was hard to get a measure of who was helped, which families and communities," says Leonard. This time, the settlement specifically requires 50% of loan modification relief to go to states that the government has determined to be hardest hit by the housing meltdown. It also requires the bank to provide more granular data on where the consumer relief is actually going, with new reporting requirements that go down to the Census block level.
But Leonard believes that there needs to be more transparency in where the assistance is going, arguing that data on geography and demographics of the loan modifications should be made public. Bank of America still has considerable discretion to decide which individuals should actually have access to help. Such practices have been a source for frustration for distressed homeowners who've waited in limbo for months or even years to see if they qualify for loan modification.
The lack of detailed data has also made it difficult to determine whether the banks are getting credit for actions they would have taken anyway. Aside from the new 50% Hardest Hit requirement for loan modifications, "The settlements have not attempted figure out how to make this relief additional relief that's beyond and above what the institution would have been doing already," says Leonard.
Green says that he'll consider "whether there’s a way to nudge this toward things they wouldn’t have done" in his role as monitor. (Bank of America, for its part, insists that the settlement "extends [the bank's] existing efforts and allows for some deeper relief for hard hit areas and individuals that what we can otherwise offer.")
Green believes, moreover, that the consumer relief package is big enough to provide help to most, if not all, of those who are eligible to receive loan modifications at this point. But that's in part because we are so far past the peak of the housing crisis.
"The number of delinquent borrowers is way down from what it was at the height of the crisis, so we ought to be able to do a really good job at getting a majority of those people who qualify," Green says. "Unfortunately for many American borrowers, it's too late for them."