Bank of America's record US$16.65 billion ($19.8 billion) settlement for its role in selling shoddy mortgage bonds, US$7 billion of it geared for consumer relief, offers a glint of hope for desperate homeowners.
The settlement requires the second-largest US bank to reduce some homeowners' loan balances, provide new loans to low-income buyers and address areas of neighbourhood blight.
But consumer advocates say few people will be helped relative to the devastation triggered by the mortgage bonds, which fuelled the worst financial crisis since the 1930s and threw millions of homes into foreclosure.
Only a fraction of homeowners would be eligible for refinancing under the settlement. And the process by which people would qualify and receive aid could drag on for years.
Those who have already lost homes to a foreclosure or a short sale - when a lender accepts less money from a sale than what the borrower owes - wouldn't likely benefit at all.
"It is certainly better than nothing," said Bruce Marks, chief executive of the nonprofit Neighbourhood Assistance Corporation of America. "But for the millions who lost their homes, it reinforces the appearance that the government has not been on their side."
Monnette Holland had been anxiously waiting the settlement, wondering if it might save her four-bedroom home in Franklin, Virginia.
"It has been a nightmare," she said. "I was hoping that we could keep our home."
Holland had refinanced her house in 2006 with Countrywide, a firm that was later bought by Bank of America and that made up the bulk of toxic mortgage securities involved in the settlement.
Holland, a 65-year-old former legal secretary, used the proceeds from the refinancing to pay off auto loans and install a new roof and windows. But then her husband was forced into an early retirement at a paper mill. And Holland had to go on disability because of health problems. The couple tried and failed several times to modify their mortgage, only to learn that its owner kept changing: After Countrywide, it was Bank of America, later Specialised Loan Servicing and most recently Bank of New York Mellon.
As an alternative to foreclosure, Holland listed her house - worth US$270,000 at its peak - for less than $90,000 in a short sale. A buyer made an offer just days before the Justice Department settlement was announced yesterday.
The Bank of America settlement will include the appointment of an independent monitor to review the consumer relief. This could take weeks and mean that "thousands of people who right now are in default or foreclosure" will miss the chance to reduce their mortgage balances, said Shanna Smith, president of the National Fair Housing Alliance.
Smith's organisation has investigated the fallout from the foreclosures. It has filed a complaint with the Department of Housing and Urban Affairs that banks failed to maintain properties after borrowers defaulted. The alliance said Bank of America enabled foreclosed homes in minority communities in Orlando, Denver, Memphis, Atlanta and elsewhere to slide into disrepair.
As part of the consumer relief, Bank of America has essentially pledged to help remedy the neighbourhood blight its neglect helped cause when it auctioned off foreclosed homes at steep discounts, Smith said.
The agreement with Bank of America caps a trio of deals over the past nine months. Each has been designed to punish some of the country's leading financial institutions for their roles in bundling sub-prime mortgages into securities that were misleadingly sold as safe investments despite the high likelihood that borrowers would default.
JPMorgan Chase agreed to a US$13 billion settlement while Citigroup reached a separate US$7 billion deal. Though the JPMorgan Chase settlement was announced in November, the planned US$4 billion in relief has yet to benefit many homeowners, according to the Home Defenders League, an advocacy group.
Bank of America had initially resisted a settlement, because almost all the bad mortgage securities that led to the settlement came from Countrywide and Merrill Lynch, the two troubled firms the bank acquired in 2008 as the financial meltdown erupted. But a federal judge in Manhattan ruled in a separate case that Bank of America was liable for those pre-merger mortgages and issued a penalty of nearly US$1.3 billion. That helped spur the bank to forge a deal, with chief executive Brian Moynihan saying yesterday that it is "in the best interests of our shareholders and allows us to continue to focus on the future".
The settlement will resolve allegations that the bank and companies it later bought misrepresented the quality of loans they sold to investors. Besides the consumer relief, the deal includes a US$5 billion cash penalty and US$4.6 billion in remediation payments. The consumer relief and remediation payments could be tax-deductible for Bank of America depending on IRS guidance.
Bank of America's stock surged more than 4 per cent yesterday to close at $16.16.
No big bank executive has faced criminal charges stemming from the mortgage crisis. But the US attorney's office in Los Angeles is preparing a civil lawsuit against Angelo Mozilo, Countrywide's former chairman and chief executive, according to a source. The lawsuit would stem from the sub-prime mortgages offered and sold by Countrywide.
Government officials touted the consumer relief being offered in the Bank of America settlement. Florida Attorney-General Pam Bondi said more than $1 billion would flow to 17,000 Florida homeowners in need. But some of that money will likely be routed through the federal government's Making Home Affordable Programme.
That programme had helped 1.3 million homeowners as of November - fewer than half the 3 million to 4 million the government had originally expected, according to the Government Accountability Office.
And those 17,000 Florida homeowners represent just 1.8 per cent of the state's population living in homes worth less than their mortgage balance, according to the real estate firm Zillow.
US Attorney-General Eric Holder said the relief package was "appropriate given the size and scope of the wrongdoing at issue".
Consumer advocates note that millions of Americans are still struggling to pay their mortgage more than five years after the Great Recession ended, a sign that the settlements are less than adequate.
"It is hard to see how these settlements provide relief commensurate with the harm caused," said Kevin Stein, associate director of the California Reinvestment Coalition. "Countless families and communities have been devastated by predatory loans that should not have been made."