October 9th, 2008 8:13 AM by Lehel Szucs
Countrywide mortgage pact may be worth $3.5 billion to California loan holders
Bank of America Corp. agrees to nation's largest mortgage-workout program to settle charges of lending abuse.
An estimated 125,000 Californians who are struggling with risky mortgages from Countrywide Financial Corp. may get their loans modified and payments reduced under a program to be announced today.
In a pact that could save mortgage holders billions of dollars, Countrywide owner Bank of America Corp. has agreed to the nation's largest loan-modification program to settle charges of lending abuse brought by California and other states.
The program could reduce payments to Countrywide borrowers and provide other benefits to total as much as $8.7 billion nationwide. It would examine nearly 400,000 loans across the nation -- about 125,000 of them in California -- to see how they could be reworked and made more affordable. That could include switching customers to fixed-rate loans or reducing the interest or principal.
Bank of America said Countrywide mortgage-servicing employees would be trained to carry out the program by Dec. 1 and would then begin reaching out to eligible customers. The plan includes a foreclosure freeze for borrowers who are likely to qualify until Countrywide has determined their eligibility, the bank said.
But officials acknowledged that some borrowers were beyond help and said these customers would need the cooperation of investors who owned the loans. Such assistance was not always forthcoming in the past.
The settlement includes a program for California borrowers who are behind on their Countrywide mortgage payments or are having their homes foreclosed by the lender.
The total value of the benefits could reach $3.5 billion to California homeowners who took out risky, adjustable-rate loans from Countrywide, California Atty. Gen. Jerry Brown said.
The program, to be announced today by Brown, applies to mortgages made before this year. It had been endorsed by at least nine states as of Sunday, including California, Florida and Texas, where Countrywide wrote the most loans.
Its central thrust -- changing the terms of subprime and other risky loans -- was to be applied across the country, even in states that might not accept the overall settlement, California and Bank of America officials said.
"It's not perfect," Brown said Sunday, "but we have some money for people who already have been kicked out of their homes, and we have money for people who may get foreclosed on later. And there are some very significant payment reductions for people. This will allow them to stay in their homes."
According to Brown's office, the settlement could save borrowers up to $8.7 billion nationwide, nearly all of it through interest rate and principal reductions. There was no word on how much people whose homes had already been foreclosed would receive.
The $8.7-billion estimate assumes that all eligible borrowers participate and that investors in mortgage securities cooperate with the loan workouts.
Those are big ifs, said Robert Gnaizda, general counsel of San Francisco's Greenlining Institute, a fair-lending advocate. "There's no way of saying how much borrowers are going to save on this. The talk of $8 billion is pure speculation," Gnaizda said after reviewing a description of the plan. "All that being said, I believe this is a very important first step."
The agreement almost certainly would rank as the largest predatory-lending settlement in history, dwarfing the nationwide $484-million settlement with Household Finance Corp. in 2002 and a $325-million settlement with Ameriquest Mortgage Co. in 2006.
Those settlements involved payments to borrowers, however, not loan modifications.
Bank of America officials said the settlement costs would not exceed those anticipated when it acquired Countrywide in July for $2.5 billion in stock.
Although numerous lawsuits and federal investigations continue against Countrywide, ex-Chairman Angelo Mozilo and other former executives, the settlement helps Bank of America shed liability for the aggressive lending that helped trigger the current global financial crisis and left hundreds of thousands of Americans stuck in loans larger than the value of their homes.
Under BofA ownership, Countrywide has stopped making the types of adjustable-rate loans that caused the most problems, officials said.
Countrywide's prior lending practices put families into loans they couldn't understand and ultimately couldn't afford, according to Brown, who said the settlement sought to compensate the borrowers.
According to the agreement, borrowers assisted by the loan workouts would not be precluded from joining private class-action lawsuits against Countrywide or pursuing their own claims.Barbara Desoer, president of Bank of America's mortgage and insurance operations, said: "We are confident that together with the attorneys general we have developed a comprehensive program that provides more solutions than ever before to assist troubled borrowers and put them back on the path to sustained home ownership."
The states of California, Illinois and Florida took the lead in the settlement, said Benjamin Diehl, a California Department of Justice attorney specializing in lending abuse. The three states had sued Countrywide and its subprime unit, Full Spectrum Lending, in June, alleging they maximized short-term profit by deceptively marketing risky loans with low starter rates to borrowers who didn't understand that their payments would one day "explode."The program will first identify customers who have fallen behind on their mortgages by more than 60 days or are likely to do so because of loan features such as rate or payment increases, Diehl said. These customers will be contacted by Countrywide starting Dec. 1.
Various options will be considered for eligible customers, with employees handling the workouts instructed to first consider refinancing into a fixed-rate Federal Housing Administration loan, Diehl said.
The options on subprime mortgages also include keeping the initial rate for five or 10 years, having the borrowers pay interest only and reducing the interest rate to as low as 3.5%, Diehl said.
For pay-option loans, many of which now amount to more than the borrower's house is worth, the options include writing the principal down to 95% of the home's current appraised value and lowering the interest rate to 3.5%, he added.
In addition to California, Florida and Texas, the states that signed the settlement are Connecticut, Washington, Arizona, Ohio, Illinois and Iowa.
Brown said he believed most of the investors who owned the loans would accept the modifications rather than foreclosure at this point.
"It's not exactly what they wanted, but it's better than default," he said. "In this environment of people talking about us heading for a depression, I think having a predetermined fixed amount coming in will be attractive to them." Countrywide mortgage aid
The total value of the benefits in California could reach $3.5 billion. The plan calls for:
* Loan modifications, mostly through reduced interest payments, and in certain cases reductions of loan balances
* Suspension of foreclosure on delinquent loans while loan modifications are being reviewed
* Waived late fees
* Payments to delinquent borrowers or people whose homes have been foreclosed
* Waived prepayment penalties for borrowers whose loans are modified, paid off or refinanced
* Additional payments to borrowers who can't afford their monthly payments after loan modifications and who lose their homes to foreclosure in the future
Source: California attorney general's office