Bank of America 2013 Annual Report Download - page 56

54 Bank of America 2013
obligated to provide additional cash payments of up to $850 million
if we fail to earn an additional $850 million of credits stemming
from incremental first-lien principal reductions and satisfy certain
solicitation requirements over a three-year period.
We also entered into agreements with several states under
which we committed to perform certain minimum levels of principal
reduction and related activities within those states in connection
with the National Mortgage Settlement, and under which we could
be required to make additional payments if we fail to meet such
minimum levels.
Subject to confirmation by the independent monitor appointed
as a result of the National Mortgage Settlement to review and
certify compliance with its provisions, we believe we have
substantially fulfilled all borrower assistance, rate reduction
modification and principal reduction commitments and, therefore,
we do not expect to be required to make additional cash payments.
The monitor has validated that through December 31, 2012, we
have earned nearly $7.8 billion in credits towards our total
obligation and we are awaiting confirmation on the remaining
credits. The borrower assistance program did not result in any
incremental credit losses as of the settlement date, as the existing
allowance for credit losses was adequate to absorb any losses
that had not already been charged-off. Under the interest rate
reduction program, modifications of approximately 24,000 loans
with an aggregate unpaid principal balance of $6.4 billion have
been completed as of December 31, 2013. These modifications,
which are not accounted for as troubled debt restructurings (TDRs),
provided for an average interest rate reduction of approximately
two percent, resulting in an estimated decrease in fair value of the
modified loans of approximately $740 million and a reduction in
annual interest income of approximately $120 million.
Under the terms of the National Mortgage Settlement, the
federal and participating state governments agreed to release us
from further liability for certain alleged residential mortgage
origination, servicing and foreclosure deficiencies. In settling
origination issues related to FHA-guaranteed loans originated on
or before April 30, 2009, we received a release from further liability
for all origination claims with respect to such loans if an insurance
claim had been submitted to the FHA prior to January 1, 2012 and
a release of multiple damages and penalties, but not
administrative indemnification claims for single damages, if no
such claim had been submitted. In addition, provided we meet our
assistance and remediation commitments, the OCC agreed not to
assess, and we will not be obligated to pay to the Federal Reserve,
any civil monetary penalties.
The National Mortgage Settlement does not cover certain
claims arising out of origination, securitization (including
representations made to investors with respect to MBS), criminal
claims, private claims by borrowers, claims by certain states for
injunctive relief or actual economic damages to borrowers related
to the Mortgage Electronic Registration Systems, Inc. (MERS), and
claims by the GSEs (including repurchase demands), among other
items.
Mortgage Electronic Registration Systems, Inc.
Mortgage notes, assignments or other documents are often
required to be maintained and are often necessary to enforce
mortgage loans. There has been significant public commentary
regarding the common industry practice of recording mortgages
in the name of MERS, as nominee on behalf of the note holder,
and whether securitization trusts own the loans purported to be
conveyed to them and have valid liens securing those loans. We
currently use the MERS system for a substantial portion of the
residential mortgage loans that we originate, including loans that
have been sold to investors or securitization trusts. A component
of the OCC consent order requires significant changes in the
manner in which we service loans that identify MERS as the
mortgagee. Additionally, certain local and state governments have
commenced legal actions against us, MERS and other MERS
members, questioning the validity of the MERS model. Other
challenges have also been made to the process for transferring
mortgage loans to securitization trusts, asserting that having a
mortgagee of record that is different than the holder of the
mortgage note could “break the chain of title” and cloud the
ownership of the loan. In order to foreclose on a mortgage loan,
in certain cases it may be necessary or prudent for an assignment
of the mortgage to be made to the holder of the note, which in the
case of a mortgage held in the name of MERS as nominee would
need to be completed by a MERS signing officer. As such, our
practice is to obtain assignments of mortgages from MERS prior
to instituting foreclosure. If certain required documents are
missing or defective, or if the use of MERS is found not to be valid,
we could be obligated to cure certain defects or in some
circumstances be subject to additional costs and expenses. Our
use of MERS as nominee for the mortgage may also create
reputational risks for us.
Impact of Foreclosure Delays
Foreclosure delays impact our default-related servicing costs. We
believe default-related servicing costs peaked in mid-2013 and
they began to decline in late 2013, and we anticipate that this
decline will accelerate in 2014. However, unexpected foreclosure
delays could impact the rate of decline. Default-related servicing
costs include costs related to resources needed for implementing
new servicing standards mandated for the industry, including as
part of the National Mortgage Settlement, other operational
changes and operational costs due to delayed foreclosures, and
do not include mortgage-related assessments, waivers and similar
costs related to foreclosure delays.
Other areas of our operations are also impacted by foreclosure
delays. In 2013, we recorded $514 million of mortgage-related
assessments, waivers and similar costs related to foreclosure
delays compared to $867 million, including $258 million related
to compensatory fees as part of the FNMA Settlement for 2012.
It is also possible that the delays in foreclosure sales may result
in additional costs and expenses, including costs associated with
the maintenance of properties or possible home price declines
while foreclosures are delayed. Finally, the time to complete
foreclosure sales may continue to be protracted, which may result
in a greater number of nonperforming loans and increased
servicing advances, and may impact the collectability of such
advances and the value of our MSR asset, MBS and real estate
owned properties. Accordingly, the ultimate resolution of
disagreements with counterparties, delays in foreclosure sales
beyond those currently anticipated, and any issues that may arise
out of alleged irregularities in our foreclosure process could
significantly increase the costs associated with our mortgage
operations.
Other Mortgage-related Matters
We continue to be subject to additional borrower and non-borrower
litigation and governmental and regulatory scrutiny related to our
past and current origination, servicing, transfer of servicing and