California walked away with the biggest chunk of this week's landmark foreclosure settlement partly because of the state's size but also because of Bank of America's desire to escape the legacy of its Countrywide problems.
The nation's three largest mortgage servicers — Bank of America, JPMorgan Chase and Wells Fargo & Co. — committed to provide California $12 billion in principal write-downs, including through short sales, over the next three years, the single largest such commitment to come out of the negotiations. About 250,000 Californians are covered under that part of the deal, struck between five big mortgage lenders, states and the federal government.
Taking into account a complex series of credits designed to encourage the banks — which also included Ally Financial and Citibank — to make payments to homeowners, California's share of the settlement could climb to as much as $18 billion. That aid would go to an estimated 460,000-plus borrowers, many in areas of the state hit hardest by the housing bust, according to the state attorney general's office.
"This outcome is the result of an insistence that California receive a fair deal commensurate with the harm done here," Atty. Gen. Kamala D. Harris said Thursday in announcing the settlement.
California's large share came even though there have been few complaints among state homeowners about the kind of improper robo-signing practices that launched the talks, which quickly morphed into settlement negotiations about errors that occurred throughout the foreclosure process. More than a year ago, evidence began emerging about robo-signing, in which foreclosure documents were signed without being read or with phony names and titles.
"The robo-signing was the hook for the investigation, that was the most outrageous thing that got the whole thing started. But the robo-signing does not amount to the worst things that servicers have done. What caused the ball to pick up steam was all of the other abuses," said Kurt Eggert, a professor at Chapman University's law school. "The servicers really needed California in this deal."
By signing on, California waived a litany of claims it could have brought against the banks, including unfair or deceptive business practices and general consumer protection statutes that applied to wrongdoing in the loan modification and foreclosure process, according to a person familiar with the talks not authorized to speak publicly. California retained some claims that other states gave up, including fair lending cases.
"California gets an extraordinary amount of it," said Iowa Atty. Gen. Tom Miller, who led the negotiations for the state attorneys general. "That's one of the things that amazed us as we went through this — how much problem there was in California."
The settlement covers only homeowners whose mortgages either are owned by the banks in the deal or are serviced by them on behalf of private investors. The settlement doesn't include homeowners whose loans are owned by government-controlled mortgage giants Fannie Mae and Freddie Mac, a share Harris estimated to be about 60% of the state's homeowners.
California's mortgage market accounts for about 13% of total U.S. loans serviced and 20% of loans by dollar size, according to Inside Mortgage Finance.
California's participation in the settlement, a prospect that was in jeopardy until the last minute, also helped increase the size of the deal, including for other states.
"They are by far the most important mortgage lending state in the country, and as a result are the most important foreclosure state," said Guy Cecala, publisher of Inside Mortgage Finance. "It is crucial to have them as part of a settlement.
"These banks badly need to get back in the business of processing foreclosures," Cecala said, "and it is a huge deal if you don't have the California attorney general breathing down your throat."
Negotiators for the Golden State were able to leverage claims against Bank of America to secure a commitment in scale and specificity that no other state was able to match. Bank of America, which has a huge portfolio of Countrywide loans from its 2008 acquisition of the Calabasas lender, was especially insistent on getting California on board. For Bank of America, the deal "made no economic sense" if California wasn't included, and most of that bank's commitment is aimed at Countrywide borrowers, according to the person involved with the negotiations.
"Because of the Countrywide challenge, we had the most at stake for our customers and shareholders," Bank of America spokesman Dan Frahm said. "Our approach to the negotiations was rigorous and disciplined with a sense of urgency to provide additional assistance to our customers and get the mortgage crisis behind us."
Wells Fargo spokesman Tom Goyada said the settlement "is not a one-issue agreement. It covers a range of issues and we are happy to have those set aside and put behind us." Chase declined to comment. Ally and Citibank did not respond to requests for comment.
Key to Harris was getting a significant amount of principal reduction for borrowers. Under the terms of the deal, banks can write principal down to the current value of the loan, or so the monthly mortgage payments make up only 31% of a borrower's income, according to the person familiar with the deal.
If the banks don't fulfill the $12-billion guarantee, they will have to make cash payments of up to $800 million directly to the state, a provision that is enforceable in California court, instead of federal court in Washington, where the rest of the deal is covered.
Incentives will direct aid to areas hardest hit by the foreclosure crisis, a "Stockton provision" that Harris sought after a visit this year to that foreclosure-ravaged city, negotiators said. Those areas are to receive relief within the first year.