Bank of America (NYSE:BAC)
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5 Years : From Apr 2012 to Apr 2017
Bank of America Corp.'s (BAC) plan to resolve investor complaints about how it treats troubled homeowners and foreclosed properties is the most significant move yet to reconcile the conflicting interests that have stymied efforts to fix delinquent home loans, said a BlackRock Inc. (BLK) money manager.
In addition to paying $8.5 billion under the agreement with 22 investors, including BlackRock, Bank of America last week agreed to send some of its highest-risk mortgages to so-called special servicers--experts who specialize in assisting troubled borrowers.
The new approach adjusts financial incentives to encourage special servicers to find out how much borrowers can afford to pay on loans, or to hasten foreclosures if they can't reach a deal. It could lead banks to cut principal amounts on more loans to stop borrowers from abandoning properties and handing banks and investors bigger losses.
The government has encouraged principal reductions, but banks have been reluctant to adopt them.
The new approach, which is intended to balance the interests of borrowers, investors and servicers, will apply to about 300,000 delinquent loans owned by the parties to this particular agreement, but it could be a model for resolving others.
Lender Processing Services estimates there are about 4 million delinquent home loans and foreclosure properties in the U.S., where housing is one of the biggest drags on the economic recovery.
"The logjam is still there, but this will address that," said Randy Robertson, co-head of structured products at BlackRock in New York. "The timing and execution is complicated, but ultimately, if you had this process prior to what we experienced, it would have been a lot smoother."
Investors and Bank of America will choose eight to 10 special servicers by August. Robertson said he expected to see results by the end of this year.
"Loans in 40- to 60-day delinquency should see traction almost immediately," he said. "We hope to see the early stage going down, and modifications rates and successes going up. The severely delinquent loans will take a while."
Fannie Mae (FNMA) and Freddie Mac (FMCC), government agencies that are the largest providers of U.S. mortgage funding, also have hired special servicers to fix loans they guarantee, as have hedge funds that own portfolios of distressed loans.
Mortgage investor Walter Investment Management Corp. (WAC) in March paid $1 billion for closely held servicer Green Tree Credit, anticipating that its specialty mortgage services would see greater demand.
Other firms that focus on distressed loans include International Business Machines Corp.'s (IBM) Wilshire Credit Corp. and Fortress Investment Group LLC's (FIG) Nationstar Mortgage unit.
Poor performing servicers have hurt investors who spent years trying to break through legal hurdles posed by bond contracts, trustees and servicers to assert their rights. As the housing crisis dragged on, investors' costs rose as modifications failed, and as the foreclosure and liquidation process kept growing.
On prime loans, the time from foreclosure to liquidation for Bank of America was 21 months as of May, according to monthly bond data and CoreLogic. The timeline for SPS, a special servicer owned by Credit Suisse Group (CS, CSGN.VX), averaged only 15 months, and Robertson said it is "reasonable" to expect that others of its kind could achieve similar results.
Robertson called the servicing mandate a "self-controlling mechanism" that ensures high-risk loans are treated by specialists sooner, eliminating the need for time-consuming legal action. Investors by themselves have little recourse, and when they can grab attention of trustees they may have to declare technical default on a servicer to change the way loans are handled.
"There were terrible legal obstacles that would have been comical if they weren't so tragic," said Sue Allon, chief executive officer of Allonhill, a Denver-based firm that assesses mortgage-loan quality.
The investor group would make servicing changes "front and center" should it approach another bank, Robertson said.
-By Al Yoon, Dow Jones Newswires; 212-416-3216; firstname.lastname@example.org