Bank of America Settlement

Bank of America and 11 US states reached an $8.4 billion accord under which BofA will modify troubled mortgages and enable nearly 400,000 Countrywide clients to keep their homes. The program is designed to resolve claims that several state attorneys general had filed against Countrywide. The program's goal, BofA said in a statement, is to enable borrowers who financed their homes with subprime loans or pay-option adjustable-rate mortgages to hang on to those homes. For BofA, "the cost of restructuring these loans is within the range of losses we estimated when we acquired Countrywide," CFO Joe Price said in a statement. The plan will reduce interest and principal on the mortgages by $8.4 billion. The program applies to mortgages serviced by Countrywide and originated before Dec. 31, 2007. The target borrowers are those who occupy their homes as their principal residences and "who are seriously delinquent or are likely to become seriously delinquent as a result of loan features, such as rate resets or payment recasts," BofA said. How will BofA ensure that the mortgage workouts will keep people in their homes? One method is to ensure that first-year payments of principal, interest, taxes and insurance will equal 34% of the borrower's income. The modified loans' interest rates will adjust with "minimal risk of payment shock and redefault," BofA said.

Bank of America's settlement is another solution that leaves some people feeling like injured parties, namely borrowers making good on their debt. BofA said it would modify $8.4 billion in subprime, adjustable rate or pay-option mortgages originated by Countrywide to let borrowers stay in their homes. The deal is obviously a win for buyers facing foreclosure. It's also a manageable loss for BofA which built the cost of this deal into its purchase price of Countrywide earlier this year. But this plan, despite its virtues, carries the same flaws as the Troubled Asset Relief Plan just enacted by Congress and really any sweeping plan designed to limit mortgage losses. It leaves responsible people holding the bag. While responsible homeowners who have cut the family budget and made good on payments despite the declining value of their homes, troubled borrowers will be able to refinance through the FHA, get lower interest rates or get a reduction in principal for pay-option mortgages.

ETA (4:14pm)

Bank Of America to sell $10 bln in common stock - MarketWatch

Market can't possibly have a good reaction to that, can it? They are essentially issuing new equity to settle a lawsuit?

ETA (10/27)

Some details of how specific mortgages may be reset:

Interest rates may be reset as low as 2.5%

Prepayment penalties and late fees will be waived

Upside-down borrowers may have principal reduced