Bank of America is nearing a reported $17 billion settlement with the Department of Justice, including a likely $7 billion in consumer relief, for fraudulent mortgage-related activities. Our analyses of earlier settlements reveal several lessons, including these five strategies that should be considered by the current parties to ensure a more successful outcome for consumers, communities, and investors:
- Harness the power of incentives. As we learned from the 2012 National Mortgage Settlement (NMS), well-constructed rules can shape bank behavior. By providing more credit for preferred actions such as principal reduction, the settlement could create better outcomes for communities and individuals.
- Give clear and substantial credit for real estate owned (REO) donations and other community-based activities. The NMS resulted in a disappointing number of REO donations, a type of consumer relief that can be incredibly beneficial to communities. By clarifying that REO donations are a preferred type of relief, the settlement could do more for communities.
- Give less credit for second liens. Conversely, the NMS saw a huge number of low quality second-lien modifications, due to strong incentives. Less credit for this type of modification could move the focus from easy write-offs to those with greater impact.
- Set limits on the use of other people’s money. Mortgages serviced for investors are viable candidates for modification when it is beneficial to consumers and fair to investors. Deciding the maximum amount of consumer relief that can be granted upfront with investor funds could help smooth investor concerns. That percent should be published prior to finalizing the settlement, so investor objections can be considered.
- Clarify and publicly disclose net present value (NPV) calculations. NPV models used to determine the loans eligible for modification are opaque to investors and the public. Clarifying and disclosing these measurements, and requiring the settlement monitor or similar party to validate that the models are properly applied to investor loans, could further investor satisfaction with this and subsequent settlements.
As the parties finalize the settlement details, we urge them to embrace these principles to help maximize benefits to consumers and communities while minimizing legitimate investor concerns.