WASHINGTON (AP) — How much will Bank of America’s expected $17 billion mortgage settlement cost the company? The answer is, almost certainly not that much.
In mega-settlements negotiated with the government, a dollar is rarely worth an actual dollar.
Inflated figures make sensational headlines for the Justice Department, and $17 billion would be the largest settlement by far arising from the economic meltdown in which millions of people in the United States lost their homes to foreclosure. But the true cost to companies is often obscured by potential tax deductions and opaque accounting techniques.
The expected Bank of America settlement will resolve allegations that the bank and companies it later bought misrepresented the quality of loans they sold to investors. Most of the problem loans were sold by Merill Lynch and Countrywide Financial before Bank of America bought them during the 2008 financial crisis. To settle the government’s claims against the three companies, Bank of America will pay $9.65 billion in cash and provide consumer relief valued at $7 billion, according to officials who spoke on condition of anonymity because the deal isn’t scheduled to be announced until Thursday at the earliest.
Bank of America declined comment on any settlement-related topics Wednesday.
Whether cash payments are structured as penalties or legal settlements can determine whether targeted companies can declare them as tax-deductible business expenses. Also, consumer relief is an amorphous cost category: If Bank of America’s deal resembles the department’s previous settlements with JPMorgan and Citigroup, that part could be less costly to the company than the huge figures suggest.
Some of the relief will, in fact, come in the form of cash donated to community organizations or, in Citi’s case, lending money to affordable housing projects at below-market rates. But much of the relief will come from modifying loans that the banks have already concluded could not be recovered in full. Reducing the principal on troubled loans often just brings the amount that borrowers owe in line with what the banks already know the loan to be worth.
Settlement math also affects the actual cost of the deals, allowing banks to earn a multiple for each dollar spent on certain forms of relief. Under Citi’s deal, for example, each dollar spent on legal aid counselors is worth $2 in credits, and paper losses on some affordable housing project loans can be credited at as much as four times their actual value.
How much the total package of cash and non-cash borrower aid is worth is impossible for outside observers to say.
“Companies that have reached for these settlements have not taken an explicit charge for it,” said Moshe Orenbuch, a banking stock analyst for Credit Suisse who has debated how to value noncash settlements with clients.
In discussing the deals with analysts, the banks “always say, ‘just remember, there’s the piece that’s cash and the piece that’s not cash.’ In general terms, they’re suggesting that the relief is stuff they’re doing anyway.”
Beyond the bonus credits, the lengthy durations of the deals mean banks can accrue some of the credits they need simply by running business as usual.
JPMorgan, for example, must provide roughly $2 billion of principal reductions to homeowners before the end of 2017. That is one-fifth the $10 billion that the bank forgave between 2009 and 2012, according to its annual social responsibility reports.
Even before its settlement with the Justice Department, the bank had committed itself to continuing the same principal reduction programs.
Both the department and the banks declined comment.