Bank of America admits defeat as servicer of mortgages – good news or bad?

The views expressed herein are those of Cathy O’Neil, and they do not necessarily represent the consensus view of the #OWS Alternative Banking group.

Bank of America just sold a bunch of its servicing contracts to Nationstar holdings. Basically this is admission of defeat from Bank of America that it is incapable of acting as a services of mortgages.

On the one hand, it’s about time, and it might be tempting to think of this as encouraging news for people in mortgage messes – at least now the incentives for Bank of America won’t be directly against working out a lower principal, right?

Well… I asked a friend (and fellow occupier) who knows this market really well and here’s his response, which I’m blogging with permission:

The news is probably best for BofA shareholders.  BofA resolved a ton of liability for a relatively low price and is exiting an area where BofA is pretty incompetent that has caused them nothing but pain.

Seems like the Administration will also try to spin it as good news, though in truth BofA stuck Fannie with lots of bad loans and is paying only for a small portion of them, meaning taxpayers will bear most of the losses.

For borrowers – I don’t think the BofA settlement with Fannie will have much direct impact – it’s about breached rep and warrants, meaning the borrowers have probalby already defaulted and aren’t likely to be helped one way or the other.  Also, for the borrowers whose servicing is being transferred – servicing transfers are terrible and so many will experience screw-ups and some will probably end up in foreclosure as a result (a few eggs have to broken etc.).  There is no evidence that Nationstar or the other servicer are any better at servicing than BofA and Nationstar is effectively doubling with this servicing acquisition so borrowers there will probably be reporting similar problems in about a year.

Overall, the market is probably better off having BofA play a smaller role in the housing market, since they are so bad at it.  They are making moves to shrink themselves, which means they will be somewhat less zombie-like.  If concentration in the mortgage market goes down, the TBTF factor is smaller, which is a good thing.

Historically, however (using Citi as an example), BofA will shrink their zombie mortgage business right as housing is starting to recover.  Once the recovery is peaking, BofA will decide they have to be back in it and will flood the market with their mortgages right when the smarter lenders are scaling back, resulting in BofA ending up with another round of bad mortgages, which will lead to another bailout and/or zombie stage.