The Housing Finance Policy Center staff wrote last month about the then-prospective $17 billion settlement between Bank of America, the Department of Justice, and state Attorneys General. We offered some suggestions about how the parties could improve the settlement for consumers and investors, compared with the 2012 National Mortgage Settlement (NMS) and 2013 settlement with JP Morgan Chase.
After reviewing the consumer-relief provisions of the Bank of America and preceding Citigroup settlement, it appears that the parties have learned from experience and considerably improved them.
The concerns with previous settlements. The way consumer relief was credited in the NMS and earlier individual settlements was not always well aligned with promoting the best outcomes for borrowers and their communities. Too little credit was given to actions that would have provided considerable benefit and too much credit was given to those of questionable value.
In addition, as we have written, the Mortgage Forgiveness Debt Relief Act’s expiration at the end of 2013 has made consumers more wary of accepting the most effective forms of relief, including principal reduction, because the debt relief could, in some cases, lead to significant federal income tax liability. Comments on the 2013 JP Morgan Chase settlement also raised this concern. Finally, the prior settlements did little to encourage activities that could have multiplier effects by improving communities hard hit by foreclosures.
Many concerns have been addressed. Much of this was improved, sometimes significantly, in the Citigroup settlement and even more so in the most recent Bank of America settlement. Here are 10 things I like about the most recent settlement.
- Consumer tax relief. In arguably the most innovative provision, the settlement requires Bank of America to put $490 million into a fund used by the Monitor to pay the Internal Revenue Service on behalf of consumers who have potential tax liability arising from principal reduction or other debt forgiveness. Payments will be the lesser of $25,000 or 25 percent of the amount reported to the taxpayer by Bank of America as discharge of indebtedness income.This requirement is a helpful and innovative way to protect beneficiaries of the settlement from bearing the cost of Congress’s frustrating failure to extend the Debt Relief Act. Moreover, establishing an administratively straight-forward formula for the payments (rather than requiring the Monitor to calculate actual tax liability for each borrower) is a refreshingly effective way to implement the measure.Nevertheless, it is uncertain whether the tax-payment formula will have the maximum impact, so it is good that the Monitor has discretion to revisit the formula based on experience. The average principal forgiveness of Bank of America loans in the National Mortgage Settlement, and more generally on mortgage debt forgiveness reported to the IRS, was well over $100,000. With a $25,000 cap on tax payments, some of these borrowers (including many who cannot take advantage of the insolvency exception) will still owe tax on the debt reduction. On the other hand, increasing the cap without increasing the amount of tax relief could result in a larger windfall for low-bracket borrowers or for those who can take advantage of the insolvency exception, and would mean fewer borrowers could be helped.
- Incentives for FHA and VA principal reductions. The Bank of America settlement for the first time encourages principal reductions on FHA and VA loans, and actually incents them by providing $1.75 of credit for $1.00 of debt forgiveness. There are special provisions to ensure that the cost of the modifications is borne by Bank of America, not by the FHA or VA. This is an important breakthrough, and the FHA and VA should be commended for coming to the table. It would be good to see the FHFA, on behalf of Fannie Mae and Freddie Mac, make a similar move in upcoming settlements.
- Second lien problem addressed, although not fully solved. Under the most recent settlement, second liens must be fully extinguished--not just reduced--to get any credit (however, 40 cents on the dollar is still available for extinguishment of liens that are more than 90 days delinquent, and for reduction or extinguishment of lower priority liens).
- Reporting required. To earn credits, Bank of America must report what activity generated the credit, and where, at the census-block level.
- Outreach events required. Each year, Bank of America must undertake eight outreach events, in disbursed locations.
My final five favorites are community reinvestment and neighborhood stabilization provisions that replicate or build on the Citigroup settlement:
- Focus on hardest hit areas. Fifty percent of the credit for debt reduction must be from Hardest Hit Areas (a set of census tracts provided by the Department of Justice for Bank of America.)
- Credit tied to lien release in certain instances. Credit for forgiveness of principal where foreclosure is not pursued is only available for occupied properties and also requires that liens be released.
- Credit tied to stabilization strategy. Credit is given for "property remediation of abandoned and uninhabitable properties" (in addition to for demolition), but credit is only given for demolition and remediation that is part of a comprehensive local stabilization strategy.
- Double credit for certain donations. Donations to (i) non-profits to assist with rehabilitation and maintenance of the donated properties; (ii) to Community Development Financial Institutions, land banks, and community development funds; (iii) to state-based Lawyer's Trust Accounts for legal aid related to foreclosure prevention and community redevelopment; and (iv) to HUD housing counselors, are credited at $2 for every $1 donated--with a $100 minimum for items (ii) through (iv.)
- More than triple credit for critical needs in high-cost areas. Credit is given for subordinated lending for "critical need family [rental] housing" in high-cost areas at $3.75 for $1 loss; and $3.25 for $1 loss for other affordable rental housing, with a total minimum of $100 million loss (where loss is defined as the difference between fair value and par value of the subordinated debt); 50 percent of the credit must be generated for family housing in high-cost areas.
Many of the provisions in this settlement, including in particular the tax-relief, FHA/VA, rental housing and community development initiatives, are significant steps forward, and it will be good to see them not only replicated, but further improved upon in future settlements. Maximizing their impact, however, depends on both the Bank of America’s choices and the Monitor’s effectiveness in enforcing the agreement.
Photo: Rob Wilson / Shutterstock.com
Ellen Seidman is a Senior Fellow at the Urban Institute’s Housing Finance Policy Center and a member of the National Consumer Advisory Council of Bank of America.