Bank of America's $17 Billion Settlement Won't Cost It $17 Billion

Bank of America in Baltimore, Maryland
George Sheldon/Alamy

WASHINGTON -- How much will Bank of America's (BAC) expected $17 billion mortgage settlement cost the company? The answer is, almost certainly not that much.

In mega-settlements negotiated with the government, a dollar is rarely worth an actual dollar.

Inflated figures make sensational headlines for the Justice Department, and $17 billion would be the largest settlement by far arising from the economic meltdown in which millions of people in the United States lost their homes to foreclosure. But the true cost to companies is often obscured by potential tax deductions and opaque accounting techniques.

Officials familiar with the deal say the bank will pay $10 billion in cash and provide consumer relief valued at $7 billion.

The agreement requires the bank to acknowledge making misrepresentations about the quality of its residential mortgage-backed securities itself and in those by Countrywide Financial and Merrill Lynch, according to the officials, who spoke with The Associated Press on condition of anonymity because the deal isn't scheduled to be announced until Thursday at the earliest.

Those two institutions were acquired by the bank in 2008 and were responsible for the bulk of the questionable loans.

The bank declined comment Wednesday.

Whether cash payments are structured as penalties or legal settlements can determine whether targeted companies can declare them as tax-deductible business expenses. Also, consumer relief is an amorphous cost category: If Bank of America's deal resembles the department's previous settlements with JPMorgan (JPM) and Citigroup (C), that part could be less costly to the company than the huge figures suggest.

Some relief comes from actions that do not cost the banks anything, including making loans in depressed areas or reducing the principal of mortgages owned by outside investors.

Banks earn a multiple of each dollar spent on some types of relief. Under Citi's deal, for example, each dollar spent on legal aid counselors is worth $2 in credits, and paper losses on some affordable housing project loans can be credited at as much as four times their actual value.

"Companies that have reached for these settlements have not taken an explicit charge for it," said Moshe Orenbuch, a banking stock analyst for Credit Suisse (CS) who has debated how to value noncash settlements with clients.

In discussing the deals with analysts, the banks "always say, 'just remember, there's the piece that's cash and the piece that's not cash.' In general terms, they're suggesting that the relief is stuff they're doing anyway."

Beyond the bonus credits, the lengthy durations of the deals mean banks can accrue some of the credits they need simply by running business as usual.

JPMorgan, for example, must provide roughly $2 billion of principal reductions to homeowners before the end of 2017. That is one-fifth the $10 billion that the bank forgave between 2009 and 2012, according to its annual social responsibility reports.

Even before its settlement with the Justice Department, the bank had committed itself to continuing the same principal reduction programs.

Both the department and the banks declined comment.

Consumer advocates said settlement amounts can obscure the actual costs at stake. But since the disputed business behaviors affected mortgage investors, not mortgage borrowers directly, they welcome any consumer aid.

"This is public policy-making through settlements that aren't even related to the nature of the lawsuit," says Ira Rheingold, executive director of the National Association of Consumer Advocates. "But there's no other tool available for people who are concerned about poor communities right now."

In the deal with JPMorgan in November, the department had a clear message for homeowners: Billions of dollars' worth of help was coming. Attorney General Eric Holder at the time described the appointment of an independent monitor who would distribute $4 billion set aside for homeowner relief.

The actual settlement has turned out more complicated than cash handouts.

Both Citigroup and JPMorgan earn credits under the settlement from different activities. Described in Citi's settlement as a "menu," these guidelines effectively are updates of consumer relief already provided through the national mortgage servicing settlement, a 2012 deal between state attorneys general and the major banks.

JPMorgan probably will earn its $4 billion in credits under the settlement through a total of $4.65 billion of activities that qualified as relief, according to a report by Enterprise Community Partners, a nonprofit run by executives from low-income housing groups and major banks.

More than half will come from principal reductions, with the rest earned through actions such as writing new loans in distressed areas, donating foreclosed properties to community groups and temporarily suspending payments on some loans.

The report described the settlement as "a reasonable model from a consumer perspective." But one of its authors, Andrew Jakobovics, acknowledged that many of JPMorgan's credits probably will come from activities that are part of its regular business practices. The bank has announced plans to complete its obligations at least one year ahead of schedule.

Citigroup's settlement gives it until the end of 2018 to earn $2.5 billion in credits. It must provide half its $825 million in principal reduction credits in neighborhoods designated as "hardest hit" by the Department of Housing and Urban Development because of high concentrations of foreclosures and vacant properties.

It also can earn credit by waiving some closing costs on new loans to low-income home buyers and forgiving principal on loans where the bank began a foreclosure but never completed it.

"Will it cost them money? No," said Rheingold, who said he supports the settlements. "But would they have done it otherwise? No."

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What a scam. Four billion of the "penalty" funded by taxpayers. If we rob a bank we go to jail. If they rob us they get a bonus.

August 22 2014 at 9:03 AM Report abuse rate up rate down Reply
Russell Bennett

This mess was started with the Community Reinvestment ACT.If a Bank refused to give out subprime Mortgages the were not allowed to open Branch Offices or to merge with other Banks. Janet Reno would vist The the bank and threaten the Bank with a investigation. On Sept 31st of 1999 The New York Times Published a Story with a Warning to Bill Clinton about what he was doing and what it would cause. That article is still available on Google as all the Banking Commitee meetings on Controling Fannie and Freddie people could see what was happening and tried to stop it. All efforts were Blocked by Dodd and Baney Frank.

August 21 2014 at 3:56 PM Report abuse rate up rate down Reply

Corporations have successfully convinced the US Supreme Court that under the 14th Amendment of the Constitution, "Corporations are persons." However, flesh and blood persons get real time in prison for massive fraud and other crimes against society. Bernie Madoff will not get off without doing prison time. Bank of America commits crimes where real people are plotting and breaking the law to the detriment of real people and institutions, as well as pension funds, governments and personal retirements. The result is described in this article: no one goes to jail, no true fines are paid, and at the end of the day, "Will it cost BA money? No." "Would BA have done it any other way? No" Bernie Madoff must be wondering if there is justice in America, this evening. It is a question each of us needs to ask. This IS Capitalism, folks. This is its ultimate and free expression written plainly for you to read and understand.

August 21 2014 at 3:48 PM Report abuse rate up rate down Reply

The government is acting like those scum bucket lawyers that use people for class actions
and pocket most of the money from the victims.

August 21 2014 at 12:49 PM Report abuse rate up rate down Reply

The cost of this fine will be borne by the stockholders and all of it should go at the very least to compensate those who were damaged by this illegal activity. Plus, the CEO and directors involved should go to prison.

August 21 2014 at 11:26 AM Report abuse rate up rate down Reply

I would suggest they also fine Barney Frank and Chris Dodd as they were the ******** who helped create the financial disaster. Make sure anybody who wat a loan gets a loan, Dah.

August 21 2014 at 10:40 AM Report abuse rate up rate down Reply

Anyone who still banks with BOA is a Fool.

August 21 2014 at 9:28 AM Report abuse +2 rate up rate down Reply

Just think, B OF A made $ off of us at least 4 ways- #1 Funding Loans to you, #2 When our Govt legally allowed companies to lay off Americans supporting families with no notice, no severance, etc in the "crisis", the Banks started Collecting on the PMI (insurance)that WE had to buy unless they put 20 % down. #3 The "Bail-out", the banks had no responsibility to pass down the benefit, so they made it seem like they were trying to help their mortgagers by these "Modification Programs" that ruin your credit by following the Bank rules (ie: stopping payments for 3 months to qualify/otherwise you weren't in distress, once you are 3 months behind they ask you to submit paperwork over and over again to be put onto a "trial period" and IF you make your modified payments on time for 6mos you are told that the missed payments will be forgiven and your payment will be significantly lowered permanently. Except that NEVER happens. At the end of 6 mos you are not approved because the only job a married, college educated Veteran could find is a $9 to 11 / hr position with Wal Mart, (a modern day Company Store") with no benefits and horrible hours-so now B OF A tells you that even tho you made every payment on time, their risk mgmt underwiters rejected you b/c your debt/income ratio is all out of wack. #4 so now that the banks have collected PMI, BAIL-OUT $, and written your mortgage off as a loss on taxes, they foreclose, let your house sit (blighting neighborhoods) for a few yrs until now that somehow our economy is better they start unloading all of them to mass buyers like "Blackstone" and other companies owned by multiple investors who fix them up with unlicensed foreigners who quickly do just enough to polish the house up and its either immediately sold or put up for rent at 3X what a mortgage would be. In meantime, you and I are no longer homeowners and scraping by to now pay rent.

August 21 2014 at 9:11 AM Report abuse +2 rate up rate down Reply

Eric Holder does not holder banking law breakers criminally responsible & accepts $ fines for their crimes. He is in essence aiding & abetting criminals & allows them toi walk the financial streets of our lives.

He is just as criminally responsible, to be criminally charged & face jail time, as the bankers he lets walk free.

August 21 2014 at 8:54 AM Report abuse rate up rate down Reply

So, bottom line, what does this mean for the consumers who BoA did wrong? What do we actually get from it?

August 21 2014 at 8:06 AM Report abuse rate up rate down Reply
2 replies to iseedeadpeople24's comment


August 21 2014 at 9:14 AM Report abuse rate up rate down Reply


August 21 2014 at 9:14 AM Report abuse rate up rate down Reply
1 reply to Tom's comment

But... B of A will screw the consumer by raising its fees for almost everything. Mark my word.

August 22 2014 at 8:42 AM Report abuse rate up rate down