What to Look Out For at Mortgage Settlement Announcement
February 9, 2012
How much?
Numbers have run the gambit from the low of $19 billion (without the participation of California) to a high of $40 billion. The standard number has been $25 billion, with news reports citing $26 billion this morning, but the main question here is how banks will pay out that figure. Will banks get credit for modifying mortgage debt or, like the tobacco settlement, will they have to actually fork over that money to the states? The mechanism by which banks pay is important here. In news reports, higher numbers are generally coupled with terms like “the modifications are worth…”
Who’s involved?
Last night brought news that California, New York, Florida and Massachusetts are all on board for the settlement. While the stability provided in the market will occur whether or not a small state like Delaware participates, the settlement would have a greater perception of comprehensiveness if an agreement was reached amongst all 50 states.
(Update: The one holdout state is Oklahoma, a bit of a blindside to many who've been following the negotiations. Details as to why Oklahoma's AG, Republican Scott Pruitt, forewent the suit are forthcoming.)
Release of Liability
This has been a real sticking point for some state AGS (cough, Schneiderman, Harris, Biden, cough). We’ve heard that the settlement only covers the action of robo-signing, which leaves the banks open for a slew of lawsuits as soon as this one is over. A good indicator of how much liability the banks will continue to face is the already-filed state AG lawsuits. WIll the likes of Martha Coakley (Massachusetts) and Eric Schneiderman (N.Y.) rescind their suits against MERS and banks? Or, will the banks continue to be liable for those charges?
Principal reductions
This is where it starts to get really complicated. Who decides which homeowners receive principal reductions and for how much? Even if the settlement was $40 billion, it wouldn’t come close to helping all underwater borrowers. Fannie Mae and Freddie Mac not participating narrows the options. Do the banks get to choose which loans they want to perform principal reductions on?
A number that’s been floated around a good deal is $20,000 per principal reduction. However, most underwater loans need a lot more than $20,000 to get out of negative equity situations. In a triage situation such as this one, who gets saved, the people who need the money most, or the people with the lowest negative loan-to-value ratios?
Moreover, most of the loans that will be modified are already securitized and technically owned by investors. How will the settlement get around this unfortunate truth, considering that most trust agreements have clauses forbidding principal reduction? One option is for the banks to buy each loan out of the pool before modifying it, which will prevent raising investor ire. However, will the banks foot the bill for buying out the loans and modifying them?
First and Second Liens
Many troubled borrowers have second liens on their houses. This is a little-discussed issue, and seeing whether loan modifications will be performed on second liens, or even forgive them entirely, will be interesting.
The $2,000 Check
Anywhere from $1.5 to $3 billion will be given in the form of checks to borrowers who have already been foreclosed upon, leaving them with $1,500 to $2,000 apiece. That much money for people without homes nearly three years after eviction is almost laughable. Even so, not everyone will receive these checks, considering how many people have been foreclosed upon. So, will people have to prove that their foreclosure was fraudulent? That a modification would have resulted in a net positive benefit for investors? We will see.
Comments (0)
Be the first to comment on this post using the section below.