Because there’s no actual term sheet for the foreclosure fraud deal it’s virtually impossible to assess it, and every group who released a press statement calling it “a drop in the bucket” or a “down payment” or a “first step” should withdraw before the facts are known. But we should be talking about how the settlement will interact with the existing Administration policies around housing.
It’s clear that the Administration sees them all working together. The settlement will advance mandated principal reductions on bank-owned loans as well as loans bundled into mortgage-backed securities. Legislation will attempt to unlock refinancing for current underwater borrowers with that profile, and $3 billion in the settlement will go toward this purpose as well, though we don’t really know how (will it pay closing costs? Will it guarantee the new refinanced loans?). For refinancing Fannie and Freddie-owned loans, there’s the tweaked HARP, which should come on line next month. There are active plans to extend forbearance, the ability to skip mortgage payments, for up to a year for unemployed borrowers, which Fannie and Freddie have picked up, along with FHA and some private lenders. And there is the new version of HAMP, which provides incentives to investors to do additional principal reductions.
But how does the new HAMP work in concert with the settlement? Paul Kiel sheds some light on that.
As part of yesterday’s deal, the five banks agreed to reduce billions in mortgage debt for homeowners in danger of foreclosure. Most of those principal reductions — about 85 percent according to Housing and Urban Development Secretary Shaun Donovan — will likely be for loans that the banks hold on their own books.
HAMP also has long offered investors incentives to encourage principal reductions. For loans owned by banks, the money goes right to them. In January, Treasury tripled those incentives. In cases in which a loan qualifies for HAMP, the government will now pay investors, often the banks themselves, up to roughly two-thirds the cost of a principal reduction.
The banks have agreed to perform at least $10 billion worth of principal reductions as part of the settlement. Because it’s unclear how many of the principal reduction modifications will be done through HAMP, it’s impossible to say how much of that will be covered by the government subsidies.
In conference calls this week, Administration officials confirmed that HAMP modifications would count toward the settlement, and they stressed that servicers would not get incentive payments. That elides the issue. On principal reductions, the INVESTORS get the payments. And as Kiel writes, that means the banks in the case of bank-owned loans. So if a servicer does a HAMP mod on a bank-owned loan, the servicer gets to count that on the settlement, and the bank gets taxpayer money as a payment. I’d be happy to be wrong about this, but of course there are no settlement details so nobody can say anything with surety, and the holders of the information aren’t talking.
This merger of HAMP and the settlement is inexplicable for any reason other than to lighten the blow on the banks. If the settlement calls for mandated principal reductions, why should any entity get paid for them as an inducement? This nudge goes out the window when you’re talking about a mandatory program.
In addition, note the “at least $10 billion” worth of principal reduction in Kiel’s excerpt. In fact, that’s what the official press statement says about the principal reduction, though many have taken Shaun Donovan’s belief that ultimately $32 billion in principal reduction will get done as gospel. That $17 billion in “credits” for anti-foreclosure operations includes not only principal reductions, but short sales, anti-blight operations, and “borrower transition” funding (like helping with moving costs). There’s been a characterization made to transform this into just a principal reduction fund. But it’s not.
There’s also this little tidbit from a McClatchy article:
Late in the day, the Justice Department announced an additional agreement in which Wells Fargo, Citigroup and Ally will be required to provide any service member who was the victim of a wrongful foreclosure with a minimum payment of $116,785 plus the service member’s lost equity and interest. Service members also will receive compensation for any additional harm suffered.
I think McClatchy got it wrong, this was announced back in November. But it shows the power of camo-washing, and the complete inequity in this deal. If you were a service member illegally kicked out of your home when you were overseas serving the country, you get $117,000. If you were a firefighter or a nurse, also serving the country in your own way, and you got illegally kicked out of your home, you get $2,000. I don’t care how much respect you have for the military, you cannot help but see a disconnect there. AS I said in November, “The servicemembers caught up in this mess deserve that money, all $116,785 of it. And so do hardworking civilians who were duped into loans, ravaged by an Wall Street-caused economic meltdown and stonewalled or outright abused in their effort to save their homes.”