In a sweeping deal that could be worth more than $8.4 billion, Bank of America Corp. has agreed to settle claims brought by state Attorneys General regarding certain risky loans originated by Countrywide Financial Corp.  The move will diffuse some of the legal problems Bank of America inherited with its purchase of Countrywide Financial Corporation last July.

The new program will involve the creation of a proactive home retention solutions expected to affect nearly 400,000 former Countrywide customers.

Bank of America plans to offer borrowers who financed their homes with subprime or pay option mortgages a pathway to affordable and sustainable mortgage payments.  Eligible borrowers occupy the home as their primary residence and have loans serviced by Countrywide and originated prior to December 31, 2007. 

Under the national program, Countrywide will not charge eligible borrowers loan modification fees, and will waive prepayment penalties for subprime and pay option adjustable rate mortgages (ARM) that it or its affiliates own. Some loan modifications will be subject to compliance with servicing contracts and some will require investor approval.



The initiative is expected to cost Bank of American $8.4 billion in interest rate and principal reductions.

Mortgage servicing personnel will be trained and will begin "proactive outreach" to eligible customers beginning December 1. Foreclosure sales will not be initiated or advanced for borrowers likely to qualify until Countrywide has made an affirmative decision on the borrower's eligibility.

First-year payments of principal, interest, taxes and insurance will be structured so as not to exceed 34 percent of the borrower's income and will feature limited step-rate interest rate adjustments in order to avoid payment shock and new defaults at a later date. Modification options include, among others:

  • FHA refinancing under the HOPE for Homeowners Program;
  • Interest rate reductions, which may be granted automatically through streamlined processing;
  • Principal reductions on Pay Option adjustable rate mortgages in order to restore lost equity for certain borrowers.

In a press release issued Monday, Barbara Desoer, president of Bank of America Mortgage, Home Equity and Insurance Company said, "We are confident that together with the Attorneys General we have developed a comprehensive program that provides more solutions than ever before to assist troubled borrowers and put them back on the path to sustained home ownership.  Since acquiring Countrywide in July, we have committed significant resources and developed innovative programs to help as many Countrywide customers as possible stay in their homes."

Borrowers in participating states will additionally be eligible to access their share of a foreclosure relief pool of $150 million for customers whose homes have been foreclosed or who are currently at serious risk of foreclosure and a second program, projected to make payments up to $70 million to provide financial aid to customers facing imminent foreclosure to assist them with their transition from home ownership.

In eligible states the company will waive late fees associated with a borrower's default in finalizing modifications under the program.

Those states that have not yet become participants in this program will be provided an opportunity to do so.  This would enable their residents who are eligible Countrywide borrowers to qualify for these benefits.

Joe Price, Bank of America Chief Financial Officer said, "By taking projected foreclosure losses and instead directing those funds into these proactive foreclosure prevention efforts, we create a solution in the best interests of both our customers and the investors whose loans and securities we service. Of the eligible loans, about 12 percent are now held by Bank of America. The cost of restructuring these loans is within the range of losses we estimated when we acquired Countrywide."