WASHINGTON -- Bank of America's record $16.65 billion settlement for its role in selling shoddy mortgage bonds -- $7 billion of it geared for consumer relief -- offers a glint of hope for desperate homeowners.
The settlement requires the second-largest U.S. bank to reduce some homeowners' loan balances, provide new loans to low-income buyers and address areas of neighborhood blight.
But consumer advocates say relatively few people will be helped relative to the devastation triggered by the mortgage bonds, which fueled the worst financial crisis since the 1930s and threw millions of homes into foreclosure.
Illinois will receive $300 million of the settlement. About $200 million of that will go toward covering losses state pension systems incurred by investing in mortgaged-backed securities. The remaining $100 million will go toward consumer relief, including blight reduction and helping those who took out "shoddy" Bank of America mortgages, state Attorney General Lisa Madigan said.
"We are holding these banks accountable for what they did to our economy and that is significant. It sends a very strong signal," she told reporters in Chicago. "We will continue to be vigilant. We will continue to clean up this mess."
The deal requires the nation's second-largest bank to pay a $5 billion cash penalty, another $4.6 billion in remediation payments and provide about $7 billion in relief to struggling homeowners. It is by far the largest deal the U.S. Justice Department has reached with a bank stemming from the 2008 financial crisis.
Madigan's office found that from 2006 to 2008, Bank of America didn't disclose the risk of residential mortgage-backed securities to Illinois' pensions systems and misled the systems when they invested in the mortgaged-backed securities market.
The settlement requires the bank to pay $154.2 million to the Illinois Teachers Retirement System, $2.6 million to the State Universities Retirement System and $43.2 million to the Illinois State Board of Investment, which oversees retirement funds for state employees, lawmakers and judges.
Illinois has the nation's worst-funded public-employee pension systems with roughly $100 billion in unfunded liability.
However, a spokesman for the largest of Illinois' five pension funds said it wouldn't have much impact overall.
"We're always pleased with these kinds of settlements, but the size of the problem is much larger," TRS spokesman Dave Urbanek said. He added that it was difficult to tell if the settlement would affect future investments as many external money managers make decisions on the roughly $45 billion the system invests.
Madigan's office said the number of Illinois homeowners who would benefit will depend on how the money is apportioned. For example, it could be distributed through grants or principal loan reductions. An independent monitor will oversee the relief distribution, according to the terms of the settlement.
U.S. Attorney General Eric Holder said Bank of America and its Countrywide and Merrill Lynch subsidiaries had "engaged in pervasive schemes to defraud financial institutions and other investors" by misrepresenting the soundness of mortgage-backed securities. The penalties, Holder said, go "far beyond the cost of doing business."
The government said the settlement, the largest reached with a single entity, wouldn't release individuals from civil charges or absolve Bank of America, its current or former subsidiaries and affiliates, or any individuals from potential criminal prosecution.
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, with payouts set to be completed as late as 2018.
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 Neighborhood 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 arthritis and other 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 Specialized Loan Servicing and most recently Bank of New York Mellon.
As an alternative to foreclosure, Holland listed her house -- worth $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 Thursday.
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 organization 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 it found that 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 neighborhood blight its neglect helped cause when it auctioned off foreclosed homes at steep discounts, Smith said.
"Bank of America created the problem," she 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 subprime mortgages into securities that were misleadingly sold as safe investments despite the high likelihood that borrowers would default.
JPMorgan Chase & Co. agreed to a $13 billion settlement while Citigroup reached a separate $7 billion deal. Though the JP Morgan chase settlement was announced in November, the planned $4 billion in relief has yet to benefit many homeowners, according to the Home Defenders League, a national 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 $1.3 billion. That helped spur the bank to forge a deal, with CEO Brian Moynihan saying Thursday 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 $5 billion cash penalty and $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 percent Thursday to close at $16.16.
No major bank executive has faced criminal charges stemming from the mortgage crisis. But the U.S. attorney's office in Los Angeles is preparing a civil lawsuit against Angelo Mozilo, Countrywide's former chairman and chief executive, according to a person with knowledge of the preparations. The lawsuit would stem from the subprime 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 Program, which was already supposed to be providing mortgage modifications and write-downs.
That program 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 a February report by the Government Accountability Office.
And those 17,000 Florida homeowners represent just 1.8 percent of the state's population living in homes worth less than their mortgage balance, according to the real estate firm Zillow.