The Settlement Hasn’t Settled Many Questions
February 10, 2012
Yesterday’s announcement that a deal was met between 49 states, federal officials and the five largest banks regarding the issue of robosigning answered few of the questions we posed yesterday regarding the settlement.
While the “who” has been largely answered, ending the suspense over whether holdout states like California would sign onto the agreement and increase the pay-out, what precisely the parties signed onto has not been made public. As yesterday’s inbox filled with reactions from advocacy groups, law firms and politicians about the $25 billion agreement, we still knew scant little about how this deal will work.
Here’s what we do know: a $25 billion agreement was reached between all state AGs but Oklahoma, federal officials and Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial. Bank of America will pay $11.8 billion, Wells Fargo $5.4 billion, JPMorgan Chase $5.3 billion, Citigroup $2.2 billion and Ally Financial $310 million.
That money will be split up, with $1.5 billion in payments to wrongly foreclosed upon borrower, $2.75 billion in aid to the 49 states (which they can spend at their discretion), $750 million to the Feds for their foreclosure and consumer protection efforts, $3 billion for refinancing and $17 billion for principal reductions. The banks have also agreed to a number of servicing changes, some for practices they’ve long since stopped, like robosigning.
Saying that banks will receive $17 billion in credits to perform principal reductions is one thing. The mechanics of how that principal reduction will be performed is a more complex beast. Laurie Goodman of Amherst Mortgage Insight said that the implications of the settlement for investors were mostly negative, because banks will “receive credit for principal writedowns on the loans owned by investors.”
However, Secretary of Housing and Urban Development Shaun Donovan made assurances when describing the settlement that principal reductions will be performed largely on loans held in the banks’ portfolios, and that the settlement will not compel trusts to perform modifications. We still don’t know whether the language in the settlement is as strong as Donovan asserts, though.
“Banks will have discretion in deciding which loans to principally reduce,” said Diane Thompson, at counsel at the National Consumer Law Center. “And at most, 5 percent of securitized loans have a legal problem” with principal reductions in their trust agreements.
The question of precisely which loans will benefit from principal reduction is still hard to say at least until the settlement terms are released. For instance, will only owner-occupied houses be eligible? Must the borrower be in default? Bose George of Keefe, Bruyette & Wood said that, like the newly-proposed Federal Housing Administration refinancing program, loans with lower loan-to-value ratios over 100 may receive relief before those with higher LTVs.
The complicated question of first versus second liens also needs to be clarified. The banks involved often own both, which amounts to a large conflict of interest when determining what kinds of modifications to pursue on a loan. Here, as Amherst Securities points out, the banks’ and investors’ incentives may not be aligned.
It also remains unclear how much power the enforcement mechanism, namely Joseph Smith as the monitor of the settlement, will have to issue banks significant penalties.
Until we get answers, we’ll keep refreshing the new website for the settlement, hoping the terms will be posted.
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