BLK BlackRock Inc

Bank of America Corp. (BAC) might reduce the loan burden on its troubled borrowers in the hope of protecting itself from the imminent mortgage servicing litigation, The Wall Street Journal reported on Wednesday. This defensivestep follows the drastic $14.5 billion loss, which the company incurred in second quarter 2011, due to mortgage related claim settlement.

High foreclosure and lowmortgage levels are troubling many American states. So deep is the housing mess that it may now well lead the country to mortgage-servicing litigation. And then, BofA’s safe-than-sorry strategy would actually prove its worth.

The Idea…

BofA is in talks with federal officials to lighten the load on its distressed borrowers. Discussions so far suggest that BofA would cut loan balances not only of its own mortgage borrowers, but also of those it services for private investors.

However, the breather would come for borrowers with a principal amount of $1 million or less, that too only in some regions.

Reason Behind the Idea

BofA’s eagerness to seek such protection can be traced back to a June catastrophe. The bank had to pay $8.5 billion to a group of investors who had suffered substantial losses for their investments in mortgage-backed securities sold by the company prior to the housing market failure.

The group of investors, including the likes of BlackRock Inc. (BLK), MetLife Inc. (MET) and the Federal Reserve Bank of New York alleged that Countrywide Financial Corp., a company acquired by BofA in 2008, had sold securities that were tied to bad-quality loans.

This hefty settlement amount -- the highest by a financial services company to date -- damaged BofA’s financials and reputation.

What about Others?

While BofA is pioneering this protective measure, there is a fair chance of other lenders follwing suit. The likes of Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM) could soon take steps to avoid huge money outflow related to mortgage settlements.

Also, large U.S mortgage servicers are already chalking out plans to modify their foreclosure practices. They are in talks on broader settlement terms with state attorney generals (AGs) and the Department of Justice (DoJ).

Is End at Sight?

Whatever the settlement by BofA and other servicers, clearing the foreclosure clutter is a long-term story. However, we are optimistic that various counteractive measures, if implemented correctly, would prevent yet another foreclosure crisis. But most importantly, it would leave a lasting impact on lenders, forcing them to be extra cautious during housing transactions.

 
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