Billions of Dollars Paid, Still a Drop in the Mortgage Bust Ocean

Photographer: Alessia Pierdomenico/Bloomberg

There's no bucket in the world big enough to fill the sea of mortgage losses.

Can you ever count paying out billions of dollars to settle claims as a victory? When it comes to mortgages, you sure can. Today brought two big mortgage settlements, one for homeowners, and one for Fannie Mae, which is getting billions of dollars from Bank of America Corp. The Market Now has had a bit of time to delve into the Bank of America settlement.

It looks like a good deal for Bank of America when you look at the number of loans involved. And probably an even better deal when you think in terms of the overall damage to the economy that came from bad mortgage loans.

The settlement with Fannie has Bank of America making two payments to Fannie. One, for $3.6 billion, covers losses that Fannie Mae has already realized on loans originated by Bank of America and Countrywide Financial Corp, the mortgage giant Bank of America bought in 2008. The other, $6.75 billion, covers 30,000 loans that Bank of America is buying back, at face value (that is, the total remaining principal of $6.51 billion, plus some interest).

What looks at first glance like a $6.75 billion price-tag is actually lot less. Those loans are certainly worth less than the principal balance, but these are not the worst of the loans that were made in the mortgage boom. Virtually all of the loans that Bank of America is buying back have been modified, are now delinquent, or both (you can see the full breakdown here). But they are not in foreclosure, and Bank of America stands to make back a significant share of what it paid.

The $3.6 billion payment will likely turn out to be the bulk of Bank of America’s cost. That seems like a surprisingly good deal, since it settles Fannie Mae’s claims on loans with an original outstanding balance of $1.4 trillion (yes some of that would already have been paid back or refinanced; still that’s a very big number). That doesn’t seem like much. Think of it this way: Bank of America is buying back 30,000 loans for $6.75 billion, or about $225,000 for each loan. At $3.6 billion the settlement on two million loans costs Bank of America about the same as buying back 16,000 loans that have gone to zero.

What exactly does that $3.6 billion represent? It’s hard to say. Jerry Dubrowski, a spokesman for Bank of America, described it as the outcome of negotiations over how much of the loss came from bad underwriting and how much from the housing bust — as Dubrowski puts it, “What drove these losses? Was it economic? Was it the fact that this person lost their job?”

“It gets to the point,” Dubrowski says, “where I no longer want to sit here and sort through the laundry dividing the hot water from the cold.” So the $3.6 billion is an alternative to going through each individual loan. That’s a fraction of Fannie Mae’s losses; Dubrowski says it’s in line with Bank of America’s other settlements with loan buyers, which Dubrowski says have come in around 10 or 15 cents for each dollar of losses.

Photographer: Jay Mallin/Bloomberg News

Angelo Mozilo, CEO of Countrywide. Most of the loans at issue were originated by Countrywide, bought by Bank of America in 2008.

Is that a fair deal for the bad loans that Fannie Mae bought? If you think simply in terms of how many loans had “underwriting problems,” perhaps it is. Fannie Mae held some of the better quality loans that Countrywide originated; they didn’t include many no-doc liar’s loans that didn’t qualify for Fannie Mae’s backing and were sold to mortgage-bond investors; Bank of America and others still face plenty of liability over those.

There’s a better way to think of the mortgage bust, though, than adding up individual misdeeds. The press tends to concentrate on liar’s loans, bogus subprime teaser rates, and sleazy fees tacked on to the bills of struggling home buyers. All those were indeed scandalous.

However, the whole is a lot more than the sum of the parts. The bottom-line problem here is that virtually every party involved in the housing boom — from banks to mortgage brokers to investors to Alan Greenspan — did their best to drive up housing prices to a point at which they were sure to blow up. The net effect was a lot greater than the damage that can be traced directly to unfair fees or improper underwriting.

Unfortunately, Fannie Mae and other mortgage buyers are not ideally positioned to build a case around the deep damage banks did with all the actions that inflated the housing bubble. Banks and mortgage underwriters may have been cynical and reckless players, but most everyone involved was to some extent a willing participant, sometimes down to the home buyers who were told, “Sure, it’s okay to buy that $500,000 house, it’ll go up in value overnight.” If you add up not just of some particularly egregious loans but the full costs of the bubble, all the banks put together can’t come close to covering the losses.

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