One agency stands to benefit considerably from the record $16.65 billion settlement reached Thursday between Bank of America (NYSE: BAC) and the U.S. Department of Justice—the Federal Housing Administration (FHA), according to one top official with the Department of Housing and Urban Development (HUD).
Under the terms of the settlement, Bank of America will pay $800 million to resolve claims arising from allegations of fraud involving certain FHA-insured single-family mortgages underwritten between May 1, 2009 and April 1, 2011, along with $200 million to resolve claims that the bank failed to perform under its servicing contract with the Government National Mortgage Association, or Ginnie Mae.
The funds paid to FHA will help strengthen the agency’s Mutual Mortgage Insurance Fund, said HUD Secretary Julian Castro in a statement.
“This global settlement will strengthen the FHA fund and Ginnie Mae, and it will provide $7 billion in consumer relief with a focus on helping borrowers in areas that were hardest hit during the crisis,” he said. “HUD will continue working with the Department of Justice, state attorneys general, and other partners to take appropriate action to hold financial institutions accountable for their misconduct and provide consumers with the relief they need to stay in their homes.”
FHA’s MMI Fund signaled a strong improvement last year, gaining $15 billion in value over the course of fiscal year 2013, according to an independent actuarial review—significant turnaround progress from the more than $16 billion shortfall the fund reported the previous year.
Apart from the initial $1 billion to be paid to FHA and Ginnie Mae, the remaining nearly $16 billion of the total settlement resolves fraud claims involving the pooling of residential mortgage backed securities, collateralized debt obligations and other claims by the U.S., along with the states of California, Delaware, Illinois, Maryland and New York and the Commonwealth of Kentucky.
Additionally, this also includes $7 billion in consumer relief, an area targeted by the ongoing efforts of the Obama Administration to provide relief to homeowners and borrowers in the hardest-hit areas during the housing crisis, according to Castro’s remarks Thursday.
Borrower relief will arrive in the form of mortgage modifications, including first-lien principal and forbearance forgiveness and second-lien extinguishments, along with low- to moderate-income mortgage originations, community reinvestment and neighborhood stabilization efforts, according to a release on the settlement issued Thursday by Bank of America.
Looking ahead, the settlement is expected to reduce the bank’s third quarter 2014 pretax earnings by $5.3 billion, or approximately $0.43 per share after tax, the company stated in the release.
Of the total settlement, Bank of America has agreed to pay $9.65 billion in cash, comprised of $5.02 billion civil monetary penalty and $4.63 billion in compensatory remediation payments—along with the $7 billion worth of consumer relief.
“We believe this settlement, which resolves significant remaining mortgage-related exposures, is in the best interests of our shareholders, and allows us to continue to focus on the future,” said Bank of America CEO Brian Moynihan in a statement.
Written by Jason Oliva