Bankruptcy

BoA Nonesense

By Adam Levitin

The irony of the CEO of Bank of America kvetching that it would be unfair to responsible homeowners for the bank to give principal reductions to homeowners in default is really too much. Does he recall that he's the CEO of a bank that is only still in business by grace of a federal bailout?

But where is Moynihan getting that he'll be required to help only deadbeats, when he feels morally bound to share the love with current borrowers?  I sure didn't see anything in the AG/CFPB term sheet that requires that.  Instead, it leaves the question of who will live and who will die up to the banks, precisely so they can't bellyache that federal regulation is restricting their ability to do loan mods, as they have about HAMP.  

Here's the relevant language from the term sheet.  As far as I can see, the basic principle for mods is NPV maximization (i.e., investor protection).  Default status surely plays a role in that calculus, but it's the servicer's decision how to account for that: 

• "Servicers employees shall not advise, instruct, or recommend that borrowers go into default in order to qualify for loss mitigation relief."  (p. 17)
• "Servicer shall consider and apply principal reductions in appropriate circumstances for sustainable modifications." (p. 18) 
• There is a particular requirement that servicers evaluate all defaulted loans with an LTV>100% or CLTV>115% for principal mods in a particular manner, but that's not saying only defaulted loans are eligible for principal mods. (p. 18)

My read here is that Moynihan's real complaint is that BoA might have to dish out $4-5B (relative to earnings of $35-40B, it's not so huge, even if it is is the largest bank fine ever by an order of magnitude) and leave the AGs and CFPB with the ability to hammer it for noncompliance.  (And again, I emphasize that the AGs and CFPB do not currently have authority over things like noncompliance with HAMP or PSAs, but would under the term sheet, meaning there would be a real cop on the beat).  

Full post as published by Credit Slips on March 09, 2011 (boomark / email).