Investors allege self-dealing in mortgage modifications
In our last post we discussed the settlement between government regulators and mortgage servicing companies that will compensate borrowers for faulty foreclosure practices. Many readers may be aware that this is not the only legal battle raging over bank conduct before and during the housing bubble burst, and in fact many major banks are also facing scrutiny over their lending practices which arguably lead to the housing bubble.
In one ongoing case, Bank of America is facing scrutiny over a settlement it reached in 2011 over alleged abuses by Countrywide mortgage, a company that it acquired in 2008. Sparing the technical details, the essence of the conflict is between investors and the bank, with investors charging that the bank pursued loan modifications that shortchanged investors in mortgage-backed securities.
A mortgage-backed security is an investment in a portfolio of mortgages that a bank has issued to borrowers in which the profit for investors is derived from the interest on the mortgage payments. Loan modifications that lower the interest rate and decrease the profit margin or eliminate profits result in a loss for investors.
A recent filing by investors who claim they were cheated by Bank of America says that 134,000 loans that were backing securities were modified, resulting in heavy losses. At the same time, the bank didn’t reduce principals on second mortgages or home equity loans on those same properties. This is a problem because it indicates that the bank was forcing a loss on investors while making it more likely that borrowers would repay the unmodified second mortgage, which may constitute illegal self-dealing.
While Bank of America officials continue to blame their legal troubles on conduct that occurred within Countrywide before they acquired the mortgage company, new documents show that the practices that are giving way to lawsuits continued after the acquisition.
For Georgia borrowers who have experienced some of the confusing and misleading lending practices perpetuated by the big banks, this revelation is probably not a surprise. Both borrowers and investors suffered under this business model, which prioritized profits of the bank over fairness and legal obligations to the people filling the coffers.
Source: New York Times, “Fresh Questions Over a Bank of America Settlement,” Gretchen Morgenson, Feb. 3, 2013.
Information about loan modifications for Georgia borrowers is available on our foreclosure prevention page.
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