A Simplified Review of the $25B Mortgage Settlement

The Center for Responsible Lending (CRL)
has published a summary of the National Mortgage Settlement Agreement which
makes it easy to review the details of the agreement between 49 of the states’
attorneys general (AGs), the federal government and five major financial
institutions and their servicing subsidiaries. 
While there has been a lot of publicity surrounding the settlement
agreement under which the banks agreed to pay $25 billion to settle claims
against them, the summary provides a thorough analysis of where the moneys are to
be disbursed and the standards for servicing that have been agreed to going
forward. 

The settlement was occasioned by
wide-spread abuses surrounding foreclosure processes used by the servicers.  These were detailed in five audit reports
from the Office of the Inspector General
for the Department of Housing and
Urban Development.

As summarized by CRL, the settlement has
both cash and non-cash components.  Five
billion of the settlement funds will be paid in cash to the state AGs of which
$1.5 billion is to be used for payments to foreclosed borrowers and for other
uses to be determined by each state’s AG. 
The summary notes that there is an intention but no requirement that
those funds be used for foreclosure prevention activities such as housing
counseling and legal services.  Two
governors, with the cooperation of their states’ AGs have already announced
they are diverting these funds to cover general budget shortfalls.

Individual borrowers who lost homes to
foreclosure from 2008 through 2011 will be eligible for cash payments of $1,800
to $2,000
.  The Center describes this as
one of the weakest parts of the settlement as borrowers might have to meet some
difficult criteria to qualify for even this small benefit.

The remaining $20 billion is to be
credited directly to borrowers
by way of formula reimbursements to servicers against
the costs of activities that servicers provide. 
At least $10 billion of this total must be used for principal reductions
in loan modifications; at least $3 billion is designated for refinancing
borrowers who are current on mortgages that are underwater.  The remaining money, up to $7 billion will go
toward other forms of relief such as forbearance for unemployed borrowers,
anti-blight programs, short sales, benefits for servicemembers who are forced
to sell homes at a loss due to military obligations and other programs.  Servicers will not necessarily be fully reimbursed
for some of these services so benefits to borrowers are expected to exceed $20
billion.  The principal reduction portion
might actually provide as much as $35 billion in financial relief to borrowers
according to CRL.

Non-cash components include a release of
claims by the AGs
and some bank regulators. 
However, these releases are only for claims regarding servicing
practices, robo-signing, and foreclosure processing and origination
practices.  It also releases federal
civil claims based on servicing of mortgage loans and loans in bankruptcy and
origination.  It does not release claims
of individual borrowers against servicers, criminal claims, securitization
claims, and some other government claims.

The remainder of the settlement deals
with reforms to the future activities of the servicers and the monitoring and
enforcement of those reforms. Some of the key reforms under the agreement are:

  • Ends
    robo-signing.
  • Requires
    evidence of standing or right to foreclose
  • Requires
    outreach to all borrowers potentially eligible for loss mitigation options
    (except those in bankruptcy) with a minimum standard for phone calls and
    written notices both pre-and post referral for foreclosure;
  • Sets
    specific requirements for loss mitigation activities including restrictions on
    dual track processes, prompt conversion of trial modifications to permanent
    status, requires an offer of modification if the loan is NPV positive, and insures
    borrowers a right to rebut a loan modification denial.
  • Short
    sale requests must be acknowledged within 10 days and specific offers responded
    to within 30 days.
  • Borrowers
    must be provided with a single point of contact that will explain options, coordinate
    documents, and keep the borrower informed.
    This contact must have access to those with ability to stop foreclosure
    proceedings.
  • All
    fees during default, foreclosure, and bankruptcy must be bona fide, reasonable,
    and disclosed.
  • Puts
    some limits on forced-placed insurance including placing at a commercially
    reasonable price.

There are also reforms dealing with
military personnel protections, blight, and tenant rights.

Enforcement of the agreement will be the
responsibility of a Monitoring Committee made up of representatives from the
state AGs and the Departments of Justice and Housing and Urban Development.  Compliance will be overseen by Joseph A.
Smith, former North Carolina Banking Commissioner, former Chair of the
Conference of State Banks Supervisors and the President’s nominee as Director
of the Federal Housing Finance Agency. 
Mechanisms for enforcement will include:

  • Internal
    quality control groups established within each servicing company;
  • Specific
    metrics to assess servicer compliance, loan modifications, and other borrower
    relief activities;
  • Reports
    from each servicer on Quarterly Compliance Reviews;
  • Reports
    from the monitor on each servicer at least annually and only after conferring with
    that servicer;
  • Servicers
    will have the right to cure any potential violations identified by the monitor;
  • The
    Consent Judgment will be filed with the District Court and enforceable therein;
  • An
    enforcement action that can be brought if a servicer exceeds the threshold
    error rate for a metric. Relief for such
    actions may be equitable relief or civil penalties of not more than $1 million
    per uncured potential violation or an amount not more than $5 million for a
    second uncured potential violation.

…(read more)

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