Not-Foreclosing As A Strategy
Bank of America Corp. has amassed $64 billion of mortgages that are at least six months delinquent and have yet to enter foreclosure, more than twice the amount held by its four largest competitors combined.
The loans are monitored as part of February’s $25 billion settlement between the top five U.S. lenders and state attorneys general over allegations of abusive foreclosure practices. Bank of America’s stockpile of deteriorating debt is mostly from its 2008 acquisition of Countrywide Financial Corp., once the nation’s largest mortgage provider. Wells Fargo & Co., the biggest U.S. servicer, has $15.3 billion of such unpaid loans.
The data, published last month by the monitor of the settlement, highlight Bank of America’s vast backlog of delinquencies, and the years it will take to work through them as borrowers fall further behind and losses mount for investors in mortgage-backed securities. While the Charlotte, North Carolina-based bank has begun modifications for many of its 275,000 homeowners at least 180 days behind as of Sept. 30, some will join the already clogged U.S. foreclosure pipeline.
“There’s just a long tail to work out all of these loans, which are severely delinquent at this point,” said Marty Mosby, an analyst with Guggenheim Securities LLC in Memphis, Tennessee.“It just shows the amount of work that’s still left to do.”
Delays in processing the loans add to the expenses borne by investors because maintenance, property taxes and other costs add up. While rising prices may make the mortgage-backed securities more valuable, servicers can be forced to come up with cash to cover interest payments from the delinquent loans and modifications become more difficult to accomplish as the borrower’s unpaid debt grows.
Bank of America’s portfolio of loans that are at least six months old and not in foreclosure accounts for 3.3 percent of all of the mortgages it services. Citigroup Inc. has 1.1 percent of its loans in that category and Ally Financial Inc., Wells Fargo and JPMorgan Chase & Co. each have less than 1 percent.
Bank of America has about 930,000 loans that are at least 60 days delinquent, down from 1.5 million from the peak in January 2010, Chief Executive Officer Brian Moynihan, 53, said during a Dec. 14 event at the Brookings Institution in Washington.
The company’s large share in part reflects an agreement made in conjunction with the mortgage settlement to delay home seizures while attempting to modify loans, as well as with other temporary moratoriums the bank implemented since 2008, said Eric Telljohann, a senior vice president in the mortgage-servicing division, which employs about 50,000 people.
Bank of America postponed foreclosure sales for more than 200,000 delinquent borrowers who may be eligible for principal reductions, and a portion of those loans were not yet in foreclosure, according to Telljohann. Most of the homeowners have been contacted, and about 40,000 of them are in trial modification plans, he said.
Mortgages on U.S. homes at the time the borrower lost the property averaged a record 728 days late in October, up from 661 days a year earlier, according to Lender Processing Services Inc. in Jacksonville, Florida. The U.S. average was 367 days in December 2008, before President Barack Obama took office and started programs to help struggling homeowners keep their residences.
While processing delays have given borrowers time to negotiate loan workouts, large lenders often lose documents and ask borrowers to resubmit them repeatedly, said Alan White, a professor who teaches consumer law at the City University of New York.
“With delinquent mortgages you want to triage them, work out ones that can be worked out and foreclose the ones that can’t,” he said. “But if the only outcome is no outcome, it’s not helping any of the parties affected, including the economy.”
Bank of America, which has been criticized by housing advocates for delaying loan workouts, has already spent more than $40 billion to clean up the loans inherited from Countrywide and faces a federal lawsuit seeking $1 billion over a program to allegedly sell defective mortgages, called the Hustle.
The firm is relying in part on falling costs from servicing bad loans to help improve profitability. Moynihan said Nov. 13 that expenses for the unit handling bad loans were peaking and should start to decline next year.
About 85 percent of Bank of America’s loans that are more than 60 days delinquent are Countrywide loans, according to Dan Frahm, a spokesman.
“No mortgage servicer has ever had to address the scale of delinquent loans that Bank of America has as a result of the Countrywide acquisition,” Frahm said in a telephone interview.“We’ve met that challenge by modifying more loans than any other servicer. We’ve participated in every available program to meet the needs of our customers and developed our own programs beyond that.”
Bank of America, “by choice or otherwise,” appears to be moving loans to foreclosure more slowly than other banks, Mark Kaufman, commissioner of the Maryland Office of Financial Regulation, wrote in a column published on Nov. 20 in American Banker, opposing a proposal to increase mortgage fees in states with long foreclosure timelines.
The data on delinquent loans not in foreclosure “seems to confirm anecdotal reports that Bank of America has been much slower than other servicers in dealing with problem loans,”said Thomas Lawler, a former Fannie Mae economist who’s now a housing consultant in Leesburg, Virginia.
Bank of America customers waited as long as two years to be told whether they qualified for the Obama Administration’s Home Affordable Modification Program, according to testimony from Ryan Quinn, a former employee. Quinn, a customer-service representative on the company’s loan-modification team from April 2010 to March 2011, testified after being subpoenaed last year by the Nevada attorney general as part of a lawsuit against the bank.
Employees were given minimal training, didn’t have computer passwords to find documents, and were discouraged from spending more than seven minutes speaking to borrowers, he said. Eighty percent of the calls Quinn took were about delays, he said.
The bank “wanted to make it take as long as possible,” Quinn told investigators. Frahm declined to comment on that.
Delays are also occurring because Countrywide loans are getting scrutinized in foreclosure cases for documentation problems such as missing promissory notes and chain-of-title discrepancies, said Tony Plath, a professor of finance at the University of North Carolina in Charlotte who follows Bank of America.
“Bank of America knows that whenever possible, defendants are likely to mount a judicial challenge at foreclosure hearings, so before they can initiate the foreclosure process they have to make sure the loans in question can withstand judicial challenge in court,” Plath said. “The large number of 180-day delinquencies relative to the other big servicers give a good indication of the magnitude of the problems that face BAC as it tries to clean up the Countrywide mess.”
The company has a “strong process in place to proceed with foreclosure when other options are exhausted” for its delinquent portfolio, Frahm said.
While Bank of America was handicapped by the Countrywide portfolio when the foreclosure crisis began, it should be better at processing loan modifications more quickly now, said Diane Thompson, an attorney with the National Consumer Law Center, a Boston-based advocacy group for low-income borrowers.
“What this is reflecting is Bank of America’s huge bureaucratic difficulties,” Thompson said. “Even five years into the crisis, Bank of America still doesn’t have a handle on how to process loan modifications in a timely matter.”