Bloomberg News

Bill Clinton Says BofA Deal May Lead to Principal Reductions

June 30, 2011

July 1 (Bloomberg) -- Former President Bill Clinton said Bank of America Corp.’s accord with mortgage-bond investors may give more “underwater” borrowers a chance to cut the amount owed on their home loans.

“You’d relieve the anxiety of countless Americans who would know they could hold onto their homes,” Clinton, 64, said in an interview yesterday with Bloomberg Television’s Al Hunt.

Bank of America, the largest U.S. lender by assets, agreed this week to pay $8.5 billion to bondholders who said they were duped into investing in defective mortgages. The deal calls for specialized servicers to manage some of the highest-risk loans, an arrangement that Clinton said could lead to debt reductions and avert foreclosures.

So-called sub-servicers “are often very effective at effecting principal-reduction modifications,” said Laurie Goodman, an analyst at Amherst Securities Group LP, which specializes in fixed-income assets such as mortgage bonds, in a note yesterday. Bank of America, which was blamed by regulators for mishandling foreclosures and modifications, may hand over loans in groups of less than 30,000 to the smaller firms.

Dan Frahm, a spokesman for Charlotte, North Carolina-based Bank of America, declined to comment. Kevin Heine of Bank of New York Mellon Corp., the debt’s trustee, also declined to comment. Kathy Patrick, a lawyer for the bondholder group, didn’t respond to a request for comment.

Leaders at some of the biggest mortgage lenders have opposed cutting homeowner debts. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has said principal reductions may be unfair and difficult to implement.

‘Hard to See’

Brian T. Moynihan, 51, CEO of Bank of America, said in April that “we do not see broad-based principal reduction as a sound policy decision” for the country.

“It’s hard to see how we could justify reducing principal for many delinquent customers who represent a small portion of borrowers, but not for the vast majority of our customers who have stayed current on their loans,” he said in the prepared text of a speech.

There is “enormous potential” to reduce the drag of U.S. housing on the economy if aspects of the Bank of America settlement are applied to the entire industry, Clinton said. The government could give an incentive to have that happen, he said.

“What I would like to see happen is some system set up to have the same thing done that they did because of this lawsuit, voluntarily, that encompasses everybody else,” Clinton said.

‘More Aggressive Program’

The Office of the Comptroller of the Currency yesterday ordered U.S. national banks to review their foreclosure practices to ensure they are following rules set out in an April settlement with the largest mortgage servicers. Widespread principal reduction has been a goal for state attorneys general who, along with the Justice Department, are in settlement talks with servicers over botched foreclosures.

“There is growing talk in Washington about solving the mortgage crisis by starting a more aggressive program than has ever been done before by writing down loan balances, starting with troubled banks,” said David Lykken, president of Mortgage Banking Solutions, an Austin, Texas-based consulting firm.

Previous government efforts to cut mortgage debts have faltered. In all, banks wrote down principal on fewer than 5,000 loans in the fourth quarter of 2010, according to the OCC.

The Home Affordable Modification Program, created by the U.S. Treasury Department in 2008, pays lenders and servicers to rewrite loan terms for borrowers who can’t make their current mortgage payments. The program’s goal of preventing 3 million to 4 million foreclosures “has been repeatedly redefined and watered down,” the Congressional Oversight Panel for the Troubled Asset Relief Program said in December.

Home-Equity Loans

Many borrowers have second mortgages from lenders who may benefit by blocking a loan modification. Writing down a first mortgage can wipe out collateral backing second mortgages, such as home-equity loans.

Foreclosures and underwater borrowers have weighed on the economy, depressing home prices and blighting neighborhoods.

By unclogging the housing market, “you lift not only an economic, but a psychological burden off of the homeowners and the banks,” Clinton said. “And we’re free to start lending again, we’re free to engage in normal economic activity.”

Clinton, a Democrat, won the presidency in 1992 and was re- elected four years later.

The Bank of America settlement was designed “to minimize the impact of future economic uncertainty and put legacy issues behind us,” Moynihan said June 29. Bank of America announced more than $20 billion in costs tied to the real estate slump, including the settlement sum and additions to reserves to resolve other disputes.

Moynihan agreed to pay the $8.5 billion to avoid repurchasing faulty loans placed into $424 billion of bonds. About $106 billion of that total either defaulted or are “severely delinquent,” and $203 billion has been paid off, Bank of America said in a presentation.

--With assistance from Jody Shenn in New York and Dakin Campbell in San Francisco. Editors: Dan Kraut, Rick Green

To contact the reporter on this story: Hugh Son in New York at Hson2@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net


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