Saturday, December 24, 2011

Bank of America's $335 Million Settlement Is the Cost of Doing Business

Bank of America agreed to pay the largest award in history for violations of fair housing laws.  Even so, the amount doesn’t come close to the injuries suffered.  I can only hope that the agreement spurs Eric Holder and the Department of Justice onward as opposed to resting on their laurels.

After an investigation of Countrywide Financial that focused on the years 2004-2008, the DoJ found a widespread pattern of blatant discrimination.

Bank of America, which absorbed Countrywide in 2008, agreed to pay $335 million to settle claims that it discriminated against minority borrowers by making them pay higher fees and placing them into costly subprime mortgages when they had the same credit histories as non-Hispanic whites who received prime mortgages.

Because subprime mortgages offered a higher yield, investment banks snapped them up to bundle, tranche and resell them to eager investors.  Countrywide brokers received a higher commission for signing borrowers to subprime contracts and independent brokers contracting with Countrywide were paid even higher commissions than that.

This settlement wasn’t a matter of ideological bias.  It was based on statistics; in other words, counting heads.  The Department of Justice compared the number of minority borrowers with non-Hispanic white borrowers who shared the same proximate credit background:
The odds of a minority applicant being steered into such a loan were more than twice as high as those for a non-Hispanic white borrower with a similar credit rating, the department said.  About 2/3s of the victims were Hispanic and one-third were black, the department said.

If a judge approves the settlement, victims will receive between several hundred and several thousand dollars, with larger amounts going to those who were steered into subprime mortgages despite qualifying for regular loans.
Even though this was by far the largest amount paid by a violator of fair housing laws, the monies paid to aggrieved parties will barely dent their injuries.  Most of the victims were placed in ARMs (adjustable rate mortgages).  As opposed to a fixed-rate mortgage where a borrower paid the same amount of interest over the life of the loan, an ARM started with a low “teaser” rate.   

If it was a 2/28 ARM (a very popular form of subprime mortgage) after two years the interest rate could ratchet up 3-4 times higher.  To give an example, a 30-year 4% fixed-rate mortgage on a $500,000 loan averages out to about $2,400 monthly.  If the ARM jacks up to 10% after two years, the monthly payment becomes $4,220.

Conservatively speaking, using the figures supplied by the Justice Department investigation, 10,000 homeowners were put into subprime mortgages under false pretenses.  According to the above calculations, each borrower paid an excess of $21,840 annually (the difference between 4220 and 2400 [1820] x 12). 

$21,840 x 10,000 homeowners is an eye-popping $218,400,000, 65% of the total settlement.  In other words, the settlement for Countrywide’s malfeasance (now Bank of America’s liability) would barely make the injured homeowners whole for one year.

Countrywide’s criminal practices allowed it to accumulate $200 billion in assets until it collapsed and was taken over by Bank of America for $2.8 billion.  Don’t mean to compare apples with oranges, but while Bernie Madoff’s victims howl to be made whole, management at these mortgage lending criminal enterprises skimmed hundreds of millions off the top and walked away, possibly suffering small fines (the cost of doing business), while their bleeding victims fight desperately to forestall homelessness.

No comments: