$17B pact might cost less; Bank of America mortgage claims.

• Author: Horwitz, Jeff
• Position: Business

Byline: Jeff Horwitz

WASHINGTON -- How much will Bank of America's expected $17 billion mortgage settlement cost the company? The answer is, almost certainly not that much.

In mega-settlements negotiated with the government, a dollar is rarely worth an actual dollar.

Inflated figures make sensational headlines for the Justice Department, and $17 billion would be the largest settlement by far arising from the economic meltdown in which millions of people in the United States lost their homes to foreclosure. But the true cost to companies is often obscured by potential tax deductions and opaque accounting techniques.

The expected Bank of America settlement will resolve allegations that the bank and companies it later bought misrepresented the quality of loans they sold to investors. Most of the problem loans were sold by Merill Lynch and Countrywide Financial before Bank of America bought them during the 2008 financial crisis. To settle the government's claims against the three companies, Bank of America will pay $9.65 billion in cash and provide consumer relief valued at $7 billion, according to officials who spoke on condition of anonymity because the deal wasn't scheduled to be announced until today at the earliest.

Bank of America declined comment on any settlement-related topics Wednesday.

Whether cash payments are structured as penalties or legal settlements can determine whether targeted companies can declare them as tax-deductible business expenses. Also, consumer relief is an amorphous cost category: If Bank of America's deal resembles the department's previous settlements with JPMorgan and Citigroup, that part could be less costly to the company than the huge figures suggest.

Some of the relief will, in fact, come in the form of cash donated to community organizations or, in Citi's case, lending money to affordable housing projects at below-market rates. But much of the relief will come from modifying loans that the banks have already concluded could not be recovered in full. Reducing the principal on troubled loans often just brings the amount that borrowers owe in line with what the banks already know the loan to be worth.

Settlement math also affects the actual cost of the deals, allowing banks to earn a multiple for each dollar spent on certain forms of relief. Under Citi's deal, for example, each dollar spent on legal aid counselors is worth $2 in credits, and paper losses on some affordable housing project loans can be...