BofA Trails in Loan Refinancing

Bank of America Corporation (BAC - Analyst Report) failed to complete a large number of mortgage modifications under the $25 billion settlement deal. This was stated in a report presented by the official, scrutinizing the foreclosure settlement agreement between the U.S. government and some of the nation’s largest banks.

This report analyzed the performance of the banks for the first time after the deal was inked in March 2012. Under the settlement deal, the five banking biggies – BofA, Citigroup, Inc. (C - Analyst Report), JPMorgan Chase & Co. (JPM - Analyst Report), Wells Fargo & Company (WFC - Analyst Report) and Ally Financial Inc. – are required to provide around $20 billion of relief to homeowners on the verge of eviction. These banks will be needed to reduce loan balances for struggling borrowers and refinance the loans for customers whose homes are worth less than the value of their mortgages.

The report states that the five banks have provided nearly $10.6 billion in relief during the period of March 1 to June 30. This has served an average of $77,000 to about 137,000 customers.

Out of $10.6 billion, approximately $8.7 billion have been contributed via short sales with BofA leading the way with $4.8 billion of short sales. Now, short sales refer to vending of homes by owners for a value lesser than the mortgage amount.

However, BofA is falling behind in the mortgage modification process as it is consuming more time to underwrite the modified loans. The company had presented $2 billion in first-lien mortgage modification trial offers and has about $803 million in trial offers in process. In comparison, JPMorgan has concluded first lien modifications worth $367 million, an amount half of its required modifications.

Moreover, BofA has not been able to finish its share of refinancing up to June 30. The company has executed $54.2 million in second-mortgage modifications, which are home equity loans.

Taking into consideration all the types of relief extended by the banks, BofA tops the list with $4.9 billion in aid, followed by JPMorgan with $3 billion, Wells Fargo with $1 billion, Citigroup with $873.4 million and Ally Financial with $755.8 million. Though the amount totals more than $10 billion, the banks are not yet midway to achieve their goals as settlement provides limited credit for certain category of assistance.

Though the settlement deal came as a big relief for the banks, they are required to meet the targeted commitments or pay fines instead. If BofA and four other banks are not able to meet the targeted modification commitments over a period of three years, they could face penalties of 125–140% of the deficit. These banks are required to complete 75% of the commitments by the end 2014 and the remaining in the next 12 months.

Though BofA has topped the short sales count, modification of the loans constitutes a bulk of the assistance to be provided to consumers. Therefore, it will be better for BofA to step up its efforts to accelerate its modification process as soon as possible. Otherwise, it can lead to huge financial implications.

BofA currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we maintain a long term Neutral recommendation on the stock.