Shaun Donovan, the Secretary of Housing and Urban Development, made some news today at the US Conference of Mayors, by saying that a foreclosure fraud settlement was imminent and that it would include principal write-downs for up to one million borrowers.
About one million American homeowners would get writedowns in the size of their mortgages under a proposed deal with banks over shady foreclosure practices, Housing and Urban Development Secretary Shaun Donovan said on Wednesday.
The deal, which could be struck within weeks, would mark the largest cut in the mortgage load since the start of the credit crisis in 2007 and could pressure the government-sponsored mortgage agencies to also reduce principal on underwater home loans.
“We’re very close to a settlement that would both fix the servicing problems, but also help over a million families around the country stay in their homes and get help,” Donovan said at a U.S. Conference of Mayors meeting in Washington.
A couple things here. First of all, there is $750 billion in negative equity in America, and the most expansive number I’ve seen for this settlement is $25 billion, or 3.3% of that. And all of that would not go to negative equity: there is reportedly money in the pipeline for wrongful foreclosures, legal aid, and penalty payments to states and the federal government. Further, there are 10.7 million properties in negative equity, and this alleged deal would help less than 10% of them.
Let’s for the sake of argument say that $20 billion will go to principal write-downs. Donovan is talking about 1 million borrowers getting help. That’s roughly $20,000 per borrower. It’s hard to figure out the average negative equity, but here’s a stab from CoreLogic:
Some interesting data on borrowers with and without home equity loans from CoreLogic: “Of the 10.7 million borrowers in negative equity, there are 6.3 million first liens without home equity loans that have an average mortgage balance of $222,000. They are underwater by an average of $52,000 which equates to an average LTV ratio of 131 percent. The negative equity share for the first lien-only borrowers was 18 percent, and 40 percent had an LTV of 80 percent or higher.
The remaining 4.4 million negative equity borrowers hold first liens and home equity loans with an average mortgage balance of $309,000. These borrowers are underwater by an average of $84,000 and have an average LTV of 137 percent.”
So a $20,000 write-down would be helpful, but on average would not get anyone back even half of the negative equity in their homes.
At this point I should say that Shaun Donovan has been predicting an “imminent” foreclosure fraud settlement for several months. Here he is from December. And here he is trying to get Eric Schneiderman to go along back in August. To Donovan, a deal is always right around the corner. He’s cried wolf enough that we should not accept these claims at face value. The settlement has missed at least a half-dozen deadlines, and is perpetually weeks away.
A better possibility would come from Fannie Mae and Freddie Mac willingly offering principal reductions on loans it owns, which would require no settlement at all. House Democrats want to subpoena Ed DeMarco to answer questions on principal reductions:
FHFA Acting Director Edward DeMarco has long defended the agency’s policy of keeping Fannie and Freddie mortgage servicers from writing down principal. Allowing such an option would only forge more losses for the government-sponsored enterprises who already owe the Treasury Department roughly $151 billion in bailouts, he and both CEOs at Fannie and Freddie concluded [...]
In a November committee hearing, DeMarco said he would provide the lawmakers documents and analysis used for determining the principal reduction policy.
But despite numerous requests since, DeMarco has not sent the materials. Reps. Elijah Cummings, D-Md., and John Tierney, D-Mass., sent a letter to committee Chair Darrell Issa, R-Calif., Wednesday asking him to subpoena the agency.
“While Mr. DeMarco has failed to provide supporting documents demonstrating why a principal reduction program is not in the best interest of taxpayers, economists are increasingly announcing their support for such a program,” Cummings and Tierney wrote.
Heck, the Federal Reserve supported principal reductions in a recent white paper. You don’t need to indemnify banks for crimes they committed to get some policymakers in a position to make decisions to agree that principal write-downs would not only be beneficial for the economy, but a better deal for mortgage investors and lenders in the long run, rather than another surge of foreclosures.
More on the Donovan speech from the Wall Street Journal, who adds a new wrinkle, that regional banks have been included in the settlement talks. US Bancorp, for example, announced that they set aside money for a settlement in a recent financial statement. PNC Financial, SunTrust Bank and HSBC are also involved.
I’ll have to see an actual settlement at this point before I believe one is truly coming. The fact that over a dozen Attorneys General met recently in Washington to plot out an alternative suggests to me that nothing is happening at a national level.