Today, Bank of America reached a historic agreement with the U.S. Department of Justice to pay the largest settlement in U.S. history related to toxic mortgage loans it knowingly sold to investors.
In short, the company admitted that it misrepresented the quality of the loans it packaged and sold to investors via its Merrill Lynch and Countrywide Mortgage brands, as well as through Bank of America.
Additionally, the bank has taken responsibility for its faulty loan origination practices that resulted in Fannie Mae, Freddie Mac, and the FHA taking on countless bad loans that eventually hurt American taxpayers (not to mention homeowners).
Simply put, the bank and its affiliates made trillions of very bad loans that they tried to pawn off, and now they must pay.
Speaking of payment, the company has agreed to pay $9.65 billion in cash, including $5.02 billion in civil monetary penalty and $4.63 billion in compensatory remediation payments.
Additionally, BofA will provide $7 billion in consumer relief, which will come in the form of loan modifications, including principal balance reductions, forbearance, and second mortgage extinguishments.
How Does a 2% Interest Rate Sound?
Most significantly, some lucky homeowners will receive principal reductions that lower their loan-to-value ratio to 75%. But that’s not all. They’ll also receive a 2% interest rate on their mortgage that is fixed for the life of the loan.
The Department of Justice provided an example where a homeowner with a $250,000 mortgage balance would see it fall to just $112,000 on a property worth only $150,000 today.
That’s a pretty good deal, regardless of what may have happened to the homeowner.
Let’s be honest, a lot of borrowers knew they weren’t providing proper income documentation either, or that their home appraisal was a tad bit steep. But I’m sure they looked the other way, just like everyone else at the time.
The DoJ also negotiated a tax break for those who receive relief under the settlement assuming the Mortgage Forgiveness Debt Relief Act isn’t extended.
They created a so-called 25/25 Tax Relief Fund where 25% of the value of the relief will be made available to offset any tax liability, up to $25,000. But the amount of money set aside is limited, so not all homeowners will be able to take advantage.
During his speech, Associate Attorney General Tony West called on Congress to extend the Act so homeowners won’t be on the hook for phantom income.
Bank of America will also be required to provide more low- to moderate-income mortgage originations, expand affordable housing initiatives, and provide community reinvestment for neighborhoods experiencing or at risk or urban blight.
The settlement is expected to reduce the company’s third quarter pre-tax earnings by $5.3 billion and reduce earnings per share by 43 cents.
Obviously the stock was up on the news, because that’s how the stock market works. But really, investors are probably happy to see the bank move forward from the mortgage mess once and for all.
And its current price of under $16 a share is still just a fraction of what it was during the previous housing boom when shares traded in the low $50 range.
Bank of America Mortgage Rates Are Pretty Competitive
At the time of this writing (November 17th, 2017), Bank of America was offering a 30-year fixed mortgage at 4% even with 0.38 mortgage points. It works out to an APR of 4.165%.
They also have a 20-year fixed at 3.75% (4.018% APR) with 0.743 mortgage points.
And a 15-year fixed is being offered at 3.50% (3.875% APR) with 0.959 mortgage points.
Bank of America also offers ARMs, including a 10/1 ARM, 7/1 ARM, and a 5/1 ARM.
As of 11/17/17, they were priced at 3.5% (3.942% APR), 3.25% (3.924% APR), and 3.125% (3.974%), respectively. As you can see, the APR of each product is very similar, so it’s important to look at all the details when deciding on a loan product.
For the record, their advertised rates tend to require a credit score of 740 or higher and a minimum 20% down payment.
Most lenders assume you’re a pristine borrower so they can advertise the lowest mortgage rates possible.