Bank of America's mortgage settlement: Good for investors now, and maybe good for homeowners later.

Commentary about business and finance.
July 1 2011 3:24 PM

Crack in the Dam

Bank of America's mortgage settlement doesn't benefit homeowners now, but it may down the road.

Angelo R. Mozilo. Click image to expand.
Former Countrywide CEO Angelo R. Mozilo

On June 29 we learned that Bank of America will pay $8.5 billion to settle claims by big investors, including the New York Federal Reserve, that mortgage backed securities sold by Countrywide (which BofA acquired in the heat of the financial crisis) weren't as pristine as they were cracked up to be. That's good news for investors. The settlement may also, down the road, create some good news for homeowners.

Bethany  McLean Bethany McLean

Bethany McLean is a contributing editor at Vanity Fair and the co-author of All the Devils Are Here: The Hidden History of the Financial Crisis.

Bethany McLean writes a weekly business column for Slate and is a contributing editor to Vanity Fair. She is the author (with Joe Nocera) of All the Devils Are Here: The Hidden History of the Financial Crisis and (with Peter Elkind) "The Smartest Guys In The Room."

BofA's misadventures in mortgages began in early 2008, when the bank's then-CEO, Ken Lewis, agreed to pay $4 billion to acquire Countrywide. It seemed like quite a bargain. The American Banker anointed Lewis "banker of the year," calling him a "critical force for stability in a tumultuous economic time."  But the Countrywide acquisition, combined with BofA's purchase of Merrill Lynch in the fall of 2008, made BofA the only major financial institution to buy its way into the financial crisis.  Thanks to the terrible quality of the mortgages Countrywide made, the deal quickly turned out to be more expensive than it had originally looked. The first sign of that came in 2008, when BofA paid the estimated equivalent of $8.6 billion in loan modifications to settle a lawsuit brought against Countrywide by 11 state attorneys general.

BofA said it had anticipated that settlement, but another front opened last fall when the big investors, which in addition to the New York Fed included BlackRock and Metlife, sent a letter alleging that Countrywide's "representations and warranties"—the legal promises to buyers about the quality of the mortgages they were buying—weren't true.  The initial group of just eight investors who owned mortgage-backed securities that had had an original face value of $104 billion quickly mushroomed to 22 investors holding securities with an original face value of $424 billion.


On Wall Street, talk began to fly that activist hedge funds were buying up sour mortgage-backed securities that were trading at big discounts with the express hope of forcing the banks to buy them back at full price. Chris Gamaitoni, an analyst at Compass Point, estimated that the 10 biggest banks, including Bank of America and Goldman Sachs, could end up losing almost $200 billion thanks to mortgage repurchases. An investor named Ron Beller, who was a former Goldman partner, put out a presentation estimating that BofA alone might have to pay as much as $74 billion to repurchase mortgages, and that its stock could fall to as low as $6. Perhaps not surprisingly, BofA's stock began to fall.

Right around the same time, the news hit that the big servicers, including, of course, BofA, had tried to turn the foreclosure process into a high-volume factory via sleazy practices like "robosigning"—having employees sign off on foreclosures without  properly reviewing the documents. A deeper worry emerged:  Could it be that the entire process of securitization was flawed? Sloppiness in the way the securities were constructed could mean that investors had been totally defrauded, because they never really owned the mortgages they thought they were buying.  That, of course, would mean astronomical liabilities for the banks.  By this spring, state attorneys general, some of whom were up in arms about the way homeowners had been treated, began to float the idea that banks would have to pay upward of $20 billion to settle some of this.



Don’t Worry, Obama Isn’t Sending U.S. Troops to Fight ISIS

But the next president might. 

IOS 8 Comes Out Today. Do Not Put It on Your iPhone 4S.

Why Greenland’s “Dark Snow” Should Worry You

How Much Should You Loathe NFL Commissioner Roger Goodell?

Here are the facts.

Three Talented Actresses in Three Terrible New Shows


The Human Need to Find Connections in Everything

It’s the source of creativity and delusions. It can harm us more than it helps us.


More Than Scottish Pride

Scotland’s referendum isn’t about nationalism. It’s about a system that failed, and a new generation looking to take a chance on itself. 

The Ungodly Horror of Having a Bug Crawl Into Your Ear and Scratch Away at Your Eardrum

We Could Fix Climate Change for Free. Now There’s Just One Thing Holding Us Back.

  News & Politics
Sept. 17 2014 7:03 PM Once Again, a Climate Policy Hearing Descends Into Absurdity
Business Insider
Sept. 17 2014 1:36 PM Nate Silver Versus Princeton Professor: Who Has the Right Models?
Sept. 17 2014 6:53 PM LGBTQ Luminaries Honored With MacArthur “Genius” Fellowships
  Double X
The XX Factor
Sept. 17 2014 6:14 PM Today in Gender Gaps: Biking
  Slate Plus
Slate Fare
Sept. 17 2014 9:37 AM Is Slate Too Liberal?  A members-only open thread.
Brow Beat
Sept. 17 2014 5:56 PM Watch Louis C.K., Dave Chappelle, Bill Hicks, Mitch Hedberg, and More on New YouTube Channel
Future Tense
Sept. 17 2014 7:23 PM MIT Researchers Are Using Smartphones to Interact With Other Screens
  Health & Science
Sept. 17 2014 4:49 PM Schooling the Supreme Court on Rap Music Is it art or a true threat of violence?
Sports Nut
Sept. 17 2014 3:51 PM NFL Jerk Watch: Roger Goodell How much should you loathe the pro football commissioner?