Bank of America said Friday that it would create a unit to handle 1.3 million soured mortgages as Brian T. Moynihan, the bank’s chief executive, tried to distance the company from the fallout of the mortgage crisis.
Brian T. Moynihan, the chief executive of Bank of America, said creation of the new unit would provide “greater focus on resolving legacy mortgage issues.”
The entity, known as Legacy Asset Servicing, will become the repository for tens of billions of dollars in troubled assets, including many subprime products that are no longer offered by Bank of America but continue to hang over the company.
Most of the loans were picked up when Bank of America bought Countrywide Financial in 2008.
Legacy Asset Servicing will also lead the handling of home loans in default, including initiating foreclosure proceedings, and deal with billions of dollars in claims by investors seeking to force Bank of America to buy back bad mortgages.
About 12 million healthy mortgages will remain with Bank of America’s home loan division, while the troubled loans in the Legacy Asset Servicing unit are gradually wound down.
Countrywide became synonymous with the riskiest practices of the subprime lending industry before its acquisition by Mr. Moynihan’s predecessor, Kenneth D. Lewis, in 2008. Since then, Bank of America has written off billions of dollars because of Countrywide even as the foreclosure policies of Bank of America and other giants created a furor among both customers and political leaders.
While this step may reassure analysts and investors, Bank of America and other mortgage servicing giants remain at the center of an investigation into foreclosure practices by all 50 state attorneys general.
One particular focus is the role of what became known as robo-signers, bank officials who signed thousands of documents a month with barely a review, as well as whether foreclosures and evictions were pursued despite the absence of crucial documents. The new unit will be led by Terry Laughlin, a longtime financial industry executive who led One West, formerly known as IndyMac, before joining Bank of America last year. Mr. Laughlin has worked with Mr. Moynihan before, most notably at Fleet, the New England banking giant acquired by Bank of America in 2004.
Legacy Asset Servicing will not be a separate legal entity, but it could make it easier for the bank to put mortgage-related losses into one basket, shifting the focus of analysts and investors to the bank’s healthier businesses.
For now, the focus of Legacy Asset will be on bad residential mortgages, but other troubled assets from elsewhere in the company may eventually be added to its portfolio. Out of the 60,000 workers now employed by Bank of America’s home loans division, about half will be under Mr. Laughlin.
The remainder will continue to report to Barbara Desoer, who currently heads the home loans group.
“This alignment allows two strong executives and their teams to continue to lead the strongest home loans business in the industry, while providing greater focus on resolving legacy mortgage issues,” Mr. Moynihan said in a statement. “We believe this will best serve customers — both those seeking homeownership and those who face mortgage challenges — as well as our shareholders and the communities we serve.”
This is the latest in a series of actions that follow Bank of America’s moratorium on foreclosures last year. The bank says it has altered its foreclosure practices, while sharply increasing the number of modifications to distressed homeowners, reaching 80,000 in the fourth quarter.
The bank set aside $4.1 billion in the last quarter to settle claims by investors who hold soured mortgage securities, citing evidence that the underlying loans did not conform to underwriting standards or that they lacked the proper paperwork.
Of that $4.1 billion charge, $3 billion was earmarked to satisfy claims by Fannie Mae and Freddie Mac, the government-controlled companies that dominate the mortgage market.
For the first time last month, the bank gave estimates about the extent of this potential liability stemming from these so-called put-back claims in the future, estimating the high end to be $7 billion to $10 billion. That is well below the tens of billions of dollars in put-back risk that some analysts have warned that Bank of America faces, a fear that weighed on its stock in October and November.
Mr. Laughlin led the negotiations leading up to the settlement with Fannie Mae and Freddie Mac.
“Whether it’s foreclosure processing, mortgage modifications when possible, our agreements with Fannie Mae and Freddie Mac, and now this, it should be apparent that we intend to continue taking aggressive steps to resolve Countrywide’s mortgage issues and help keep things moving forward,” Larry Di Rita, a spokesman for the company, said.
Ever since the “good bank, bad bank” concept was introduced by Mellon Bank in the late 1980s to cope with a raft of troubled real estate and corporate loans, dividing a financial institution has become a fairly routine part of the Wall Street playbook.
Chase Retail Services, the consumer banking unit of JPMorgan Chase, announced last year that it would break out its most troubled home equity and mortgage loans, underwritten in the boom years preceding the crisis. New and existing real estate loans, which meet the bank’s tougher lending standards today, are reported in a separate category.
In January 2009, Citigroup began siphoning into Citicorp the major businesses that it planned to keep and created Citi Holdings as a unit for troubled assets and other noncore businesses that it planned to sell. UBS and several regional banks have adopted similar strategies as part of their restructuring plans.
In a separate announcement, Bank of America said it was leaving the reverse-mortgage business, which served older customers who wanted to extract cash by borrowing against the equity in their homes. While the bank will no longer provide reverse mortgages, it will continue to service existing ones.