Almost a week after the announcement of a foreclosure fraud settlement, experts are trying to determine what’s in it, given the absence of a term sheet. This chart at analyst SNL’s site shows one problem: it has a total settlement listed at $25 billion, but just California and Florida’s numbers add up to $26.4 billion. The accounting, as we discussed, goes this way:
The accounting in the settlement is somewhat confusing. The much-quoted $25 billion figure includes $17 billion that banks must spend on a variety of programs to help beleaguered borrowers. Banks will receive credits for each dollar spent. “Sometimes they get a dollar for dollar credit, sometimes they get 45 cents on the dollar, sometimes they get 10 cents on the dollar,” Iowa Attorney General Tom Miller explained during a press conference. “The benefit to homeowners on the full dollar amount is $32 billion.” In addition, the deal includes $3 billion dedicated to refinancing loans and $5 billion to be paid to federal and state governments.
Using these figures, the settlement totals closer to $40 billion. California will receive up to $18 billion — a large proportion of the overall settlement and far more than the estimated $4 billion in relief that the state was set to receive when California Attorney General Kamala Harris walked away from negotiations in September 2011.
The New York Times, in a beat sweetener on Harris today, praise the Attorney General for getting maximum value for California.
But this is not as cut and dried as Harris or Miller make it, and the giveaway is the line that “up to” the various dollar amounts will be collected. We cannot possibly know what the $17 billion in short sales and principal reduction will end up as in real value. It’s largely at the discretion of the banks to determine what types of principal reduction they will undertake. They get certain “credits” for certain types of write-downs, and I don’t believe they have even formulated a strategy as to what write-downs to target. Moreover, media reports have alternately said that banks will write down a “substantial” amount on private-label mortgage-backed securities loans, or that they have no authority to do so without the consent of the investors and will thus opt against it. We know that PLS loans will get less credit – around 40 cents on the dollar – but we do not have a precise menu about types of principal reductions and the associated credits they will rate.
Simply look to the figures listed by the five banks who made the agreement as to their financial commitment to get a sense of how unknowable this all is, especially without a term sheet:
At the time of publication, Ally Financial Inc. had not released details of its financial commitment. At $11.8 billion, Bank of America Corp. had the largest commitment of the remaining four mortgage servicers named in the settlement. Both Wells Fargo & Co. and JPMorgan Chase & Co. put their commitments at about $5.3 billion.
The monetary component of Citigroup Inc.’s portion of the settlement totals $2.2 billion. Citi said it will adjust its fourth-quarter and full-year 2011 financial results to reflect additional after-tax charges related to the settlement and related mortgage litigation.
So you have four of the five banks putting their commitment at a total of $24.6 billion. Ally is the smallest of the five banks in terms of its mortgage market. So even if they kicked in as much as Citi, you would get a total commitment of $26.8 billion from those five banks, substantially less than $40 billion contemplated in the AG documents. And the real number for Ally, when they release it, will probably be less.
Yves Smith also raised some issues about a broader liability release than first reported, particularly as it relates to MERS. Sources close to the AG offices tell me that information released by the Wall Street Journal yesterday were old draft documents from January, before certain lawsuits against MERS and bank activities in MERS, by AGs such as Eric Schneiderman, were made public. So those could be outdated. Smith bases her story, however, on the public executive summary at the National Mortgage Settlement website.
But again, this is what happens when you don’t have a term sheet released, so everyone is by and large guessing at the implications of the settlement. It’s a complete travesty that these terms are thus far absent, raising a host of questions about liability, the financial terms and enforcement.