In a deal with the Justice Department, the bank agreed about $7bn should go to homeowners. History reminds us not to hold our bre
The Justice Department has inked yet another cash settlement for misconduct in the production of mortgage-backed securities, this time with Bank of America for $16.65bn.
Don’t expect a lot of that to be of any help to people who lost their homes.
While Bank of America is ostensibly devoting around $7bn of the money to consumers, homeowners will actually see very little money or help.
The JP Morgan precedent
We can look to the first settlement of this type with a bank – last November’s deal with JPMorgan Chase – and draw some conclusions.
Under that settlement, which the Justice Department called a template for future fines against the banks, JPMorgan is supposed to deliver $4bn in consumer relief, primarily through reducing interest rates or principal on mortgages.
But homeowners will have to wait. Like the other banks, JPMorgan has three years to make good on this relief. An initial report from Joseph Smith, who is overseeing JPMorgan’s consumer relief obligation, shows that the bank’s money is not exactly flying out the door to homeowners.
As of 31 March of this year, five months after the settlement, JPMorgan only claimed verifiable modifications on 100 loans, for a grand total of $6m in credited relief – a little under 1% of the total it has promised. Even though the settlement provides a bonus credit for relief delivered within the first year, JPMorgan has decided to stretch things out.
Community housing activists like the Home Defenders League have repeatedly questioned whether relief will ever materialize. The group even filed a Freedom of Information Act request in July, asking the Justice Department about how the JPMorgan settlement is being implemented.
“The bankers bought their way out of jail, but the money hasn’t actually arrived to help the families who need it,” said Kevin Whelan, National Campaign Director of the Home Defenders League, in a statement.
A punished bank is forced to lend
JPMorgan and its competitors don’t necessarily have to give relief directly to homeowners to pay their way out of their penalties. They can just sign more loans. Under the language of the settlements, banks can get credit for making new mortgages available to borrowers in hard-hit areas or Fema disaster zones, to first-time low- to moderate-income buyers, or to borrowers who lost their homes to foreclosures and short sales.
Since making loans is the bank’s actual business, from which they profit, it’s odd that this is considered a penalty for misconduct.
Banks only get a flat $10,000 in credit for each loan made, as opposed to dollar-for-dollar relief on principal forgiveness.
And they can only use this trick to pay off a paltry $165m of the $4bn in relief they owe homeowners. But a smart bank would take the “penalty” of making a profitable loan over cutting principal any day.
How to get credit: tear down the house
Banks also can get credit under the settlement for demolition of blighted properties, donations of homes, or funding for community development projects. These all may be worthy causes, but they don’t directly help struggling homeowners facing foreclosure. And JPMorgan can use these anti-blight measures to satisfy as much as $2bn, or half, of the penalty.
Finally, even if homeowners manage to secure relief for their mortgage debt, under current law they would have to pay taxes on it.
Want mortgage help? The $25,000 tax bill
The Mortgage Forgiveness Debt Relief Act, which would have protected homeowners from taxes on debt relief, expired last December, and there’s no guarantee that Congress will retroactively renew it. That means that any benefit from forgiveness of principal gets treated for tax purposes like earned income.
On a principal reduction of $100,000, the tax bill would be around $25,000 for the typical homeowner. Stressed families at risk of foreclosure don’t usually have tens of thousands of dollars lying around to devote to taxes for phantom “income” they don’t actually see. So the “consumer relief” may actually harm them.
Clearly worried about the potential for hitting customers expecting help with a tax bill, on this settlement the Justice Department forced Bank of America to place $490 million in a “tax relief fund” to defray any tax liability arising from delivering debt relief. This was not a feature of other Justice Department settlements with JPMorgan Chase and Citigroup, and shows the very real fear that the Mortgage Forgiveness Debt Relief Act will not be renewed. JPMorgan and Citi customers will be out-of-luck victims of bad timing, but Bank of America borrowers will theoretically be more protected.
However, if $490 million in the settlement goes toward the unintended tax consequences, that much less will go to help borrowers stay in their homes. So fewer homeowners will get aid as a result. And Bank of America has four years, until August 2018, to comply with the relief terms.
Put aside the fact that no cash payment will suffice either as just compensation for the magnitude of the losses or as deterrent for the enormity of the crimes – at least not without executives seeing the inside of a jail cell. Put aside the fact that the crime described here is swindling investors, yet investors will reap virtually none of the benefits, with most of the cash penalty going to the Justice Department itself. Put aside that this normalizes slaps on the wrist: banks can pay their way out of trouble without even having to describe their wrongdoing in detail.
Homeowners have waited for years for aid from the toxic loans banks knowingly and fraudulently sold them. These Justice Department settlements haven’t sped relief to them either, and may only give them more headaches.