What Kind of Mods are on the Multistate Menu?
February 14, 2012
The largest penalties resulting from the recently announced $25 billion multistate robosigning settlement will be dedicated towards a “menu” of other forms of loan modifications, including, most prominently, principal reduction.
Although the settlement terms have still yet to be released, it is becoming clearer what’s on the menu and how it will be dished out.
In announcing the settlement last Thursday, Secretary of Housing and Urban Development Shaun Donovan explained that the principal reductions made by Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial would not count dollar-for-dollar against their $17 billion obligation to write down loans.
According to HUD spokesperson Brian Sullivan, servicers have a clear-cut set of options for their $17 billion: principal reduction on first liens, principal reduction on second liens, short sales and deficiency waivers, cash for keys, unemployment forbearance and anti-blight measures in the community.
Each of these options has a corresponding percentage of the money spent that the banks will receive as credit. For instance, deficiency waivers are worth 10 percent, according to Sullivan, meaning a deficiency waiver that costs $50,000 will result in the servicer receiving $5,000 worth of credit.
“Banks will also receive credit for getting money out the door more quickly,” said Sullivan, explaining that speed, in addition to substance, will be rewarded.
Until the terms are released, however, rumors dominate the conversation regarding which loans will be made available for principal reductions and the like. While Donovan made assurances that the servicers will not violate any trust agreements, which Reuters backed up yesterday, investors remain concerned.
Reports that principal reductions for second liens are on the table for banks will not quell investors. This sets up skewed incentives for banks, who often own the first and/or second lien; if they reduce the principal on a second lien, held by investors, it will improve banks’ positions on the first lien. We will have to wait to see whether the terms of the settlement protect investors from these, and other, losses.
For more details on the settlement, visit www.nationalmortgagesettlement.com .
Other areas of interest
- Mortgage Servicing
- Foreclosure
- HUD
- MBS Investors
- State Regulators
- Legal Issues
- Mortgage Lending & Servicing
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