Countrywide finds loophole, and McMahon sees a Blumenthal gaffe

Linda McMahon's campaign is seizing on a new investigative report by The Nation (I'm guessing the candidate doesn't suscribe) that shows that Bank of America and its subsidiary Countrywide have been able to escape through a major loophole in their 2008 settlement on predatory lending charges.

That settlement came as attorneys general from around the country, including McMahon's opponent, Richard Blumenthal, were demanding that the company make loan modifications to allow some of the customers who had bought dicey mortgages from Countrywide to stay in their homes.

The Nation reports:

If all fifty states were to sign on to the settlement, Brown's office estimates (forty-four have so far), it would provide $8.68 billion in reduced payments and fee waivers to some 400,000 Countrywide borrowers struggling to stay in their homes. And a small Foreclosure Relief Fund of $150 million would provide direct payments to Countrywide borrowers who have already lost their homes to foreclosure. Various media called the settlement a "landmark," "a win for homeowners" and "the nation's most comprehensive mortgage-modification program," reporting that 8,000 homeowners in Ohio, 13,000 in Arizona, 57,000 in Florida and 120,000 in California would all "escape foreclosure" through major loan modifications. Relief Is in Sight, read one headline.

But two years later, many Countrywide borrowers facing foreclosure have not even been notified that they may qualify for the settlement. It has kept, at best, about 134,000 families in their homes, and most of these only temporarily. Countrywide and its parent company, Bank of America, have blocked many subprime borrowers from access to the best aspect of the deal—principal reduction—in favor of short-term fixes that could easily spell disaster down the road. The settlement is silent on the question of second liens—home equity loans—which have played such a significant part in the foreclosure crisis, jeopardizing the possibility of truly affordable modifications. And the biggest loophole of all? Bank of America has the right to foreclose on the victims of Countrywide's predation whenever its analysts determine—using an undisclosed formula—that it can recoup more money through foreclosure than by modifying the loan.

Even worse, the article notes, is the hit that the pension funds that invested in Countrywide's mortgage-backed securities, particularly California's massive CALPERS, could be the ones to lose out:

... these investors who will bear most of the expense of complying with the settlement, in the form of permanently reduced principal and interest payments on their bond holdings. Believe it or not, this aspect of the deal was overlooked by the settlement. Richard Blumenthal, attorney general of Connecticut, one of the original parties to the suit, seems to have missed it entirely, claiming in his October 2008 announcement, "This settlement will cost BofA as much as $8.6 billion, but no cost, not a dime, to taxpayers."

In fact, much of the settlement's cost has been covered by taxpayers. Bank of America is allowed to use federal incentives under President Obama's $75 billion Home Affordable Modification Program (HAMP) toward the loan modifications it is required to make as the mortgage servicer for the Countrywide portfolio. In total, of its entire Countrywide financial servicing portfolio—which goes beyond the loans covered by the settlement—BofA is eligible for as much as $4.5 billion in federal incentives for completed modifications, according to an analysis by the Center for Public Integrity as reported in Mother Jones. That's a hefty government rebate.

The McMahon campaign is slamming Blumenthal not only for helping put together a settlement that Bank of America has been able to evade in spirit, if not as a matter of law, but also because he continued to defend the settlement as the best recourse for homeowners, even after complaints emerged and other attorneys general had stopped boasting about the deal.

Read the whole piece by The Nation's Alex Ulam here.

Update: Blumenthal campaign manager Mindy Myers responds:

"This story is inaccurate. The settlement reached did not have any cost to taxpayers. Four months after the settlement was signed, in an action Dick could not have predicted, the Obama Administration created the HAMP program with funds from the Wall Street bailout that Dick opposed. Dick Blumenthal has a long record of fighting predatory lending by the big banks and working to keep people in their homes."

Paz has more.

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