DS News - Digital Archives

» • Make foreclosure a last resort by requiring servicers to evaluate homeowners for other loan mitigation options first. • Restrict banks from foreclosing while the homeowner is considered for a loan modification. • Set procedures and timelines for reviewing loan modification applications and give homeowners the right to appeal denials. • Create a single point of contact for borrowers seeking information about their loans and require adequate staff to handle calls. Not so fast, Sharga says. "The AG settlement terms haven't done anything noteworthy—nor are they likely to—in terms of improving communications between borrowers and lenders or servicers," Sharga said. "The terms were largely prescriptive in nature, offering a playbook that servicers need to follow. As servicers were already doing virtually all of the tasks identified within the settlement (albeit not necessarily in exactly the same manner), we shouldn't see significant changes." Banks Set to Score As it turns out, the banks could be the winners in this deal, according to analysts at Credit Suisse. "Given that the foreclosure settlement has been pending for some time and the settlement amount came in line with previous press reports, the large banks have already made substantial accruals related to this settlement. Bank of America, Wells Fargo, and JPMorgan issued press releases indicating that existing reserves were sufficient to cover relief programs and cash payments," Credit Suisse said in a commentary note. It continued: "The finalization of this settlement should provide relief to the large banks with Bank of America in particular, given its relatively large mortgage-market share and issues surrounding its mortgage business. The settlement compensates for the robo-signing issues and allows the servicing industry to move forward." VISIT US ONLINE @ DSNEWS.COM The recipe for a settlement was there: politically ambitious state attorneys general targeting an unpopular industry with lawsuits based on creative legal theories. The settlement will also help shore up second liens—about $400 billion—which are essentially worthless if the first mortgages ahead of them are underwater. If the banks don't write down the second liens alongside the first mortgages, the seconds become more valuable. A lower principal balance on the first mortgage makes the second more likely to pay. Not writing down second liens though also makes modifying a first mortgage more complicated. While the numbers in the settlement look big—though not as big as the $206 billion tobacco settlement—it is expected to help only 9 percent of all the underwater mortgages in the country at an average of about $20,000 per household. Dean Baker, co-director of the Center for Economic Policy and Research, cites research from CoreLogic that indicates the average negative equity for underwater homeowners is about $60,000. "If the banks actually give $20 billion in debt relief as a result of this settlement, that would be sufficient to give $20,000 to 1 million homeowners," Baker said "That's helpful but little more than a drop in the bucket." According to Diggle, the write-downs provided for in the settlement would cover about 2.4 percent of the total negative equity dragging down the nation's housing stock. And the settlement is not clear as to whether affected homeowners will indeed get that much of a write-down. "The banks," according to Baker, "will be able to count write-downs of loans that they are servicing against [the write-downs required under the agreement]. These losses will come out of the pockets of the investors in mortgage-backed securities, not the banks' pockets. This means that the defendant in a civil case is effectively being allowed to pay its penalty with someone else's money. This is, at the least, unusual." A Very Slow Go Significant numbers in the settlement have tempted cash-short state governments. According to Sharga, states like California, Arizona, and Florida have announced plans to take their share of the $25 billion settlement and use it to plug their budget deficits. Shortly after the settlement was announced, the promise of a single point of contact quickly became a crucial element with critics skeptical that the deal would be more successful than previous agreements in prodding lenders and servicers to negotiate loan modifications. In spring 2011, the industry made many of the same pledges under consent orders with the Office of the Comptroller of the Currency (OCC) and Federal Reserve, but according to some consumer advocates, there has been barely any improvement. They claim that even when a single person is assigned to the cases, one phone call after another goes unreturned. According to the OCC, banks have made considerable progress since the consent orders were agreed to last spring, and the single point of contact and other improvements should be largely in effect by the end of 2012. "We are satisfied they are moving in that direction," Bruce Krueger, lead mortgage expert at the comptroller's office and a member of its large bank supervision team, told The New York Times. "These are large companies with a lot of complicated processes. It's not just about putting a Band-Aid on the issue; it's about getting the issue right." According to Doucet, homeowners and regulators will have to be patient on righting the issues. "I think getting the banks to quickly honor the settlement," Doucet said, "is like trying to turn a cruise liner around on a dime." 49

• Cover