It’s embarrassing that the most information we’ve yet received about the foreclosure fraud settlement comes from an annual report to stockholders by Wells Fargo. In other words, we had to wait for the banks to tell us what was in the settlement, I guess because the regulatory officials who negotiated it weren’t entirely proud of their work.
The Wells Fargo notice (it begins on page 74) isn’t legal language, and it states clearly that “the terms… do not become final until approval of the settlement agreement by the U.S. District Court and execution of a consent order.” But it provides more detailed information than the broad sketch that has been released. For example, we have the first breakdown that I’ve seen of the credit system for principal reductions.
first lien principal forgiveness for LTV less than or equal to 175%: 100% credit (must constitute at least 30% of the Consumer Relief Program credits);
first lien principal forgiveness for LTV greater than 175%: 50% credit for portion forgiven over 175% LTV;
forgiveness of forbearance amounts on existing loan modifications – 40% credit;
earned forgiveness over no more than a 3 year period: 85% credit for LTV less than or equal to 175%; 45% credit for forgiveness over 175% LTV;
second lien principal forgiveness: 90% credit for loans 90 days or less delinquent; 50% credit for loans greater than 90 but less than 180 days delinquent; 10% credit for loans 180 days more delinquent. Subject to a number of requirements, servicers participating in the settlement will be obligated to implement second lien principal forgiveness on second mortgages it owns when another participating servicer reduces principal on a first mortgage via its proprietary non-HAMP modification programs (must constitute at least 60% of the Consumer Relief Program credits when combined with the first lien principal forgiveness credits);
deficiency balance waivers on first and second lien loans: 10% credit;
short sale deficiency balance waivers on first and second lien loans: 20% to 100% credit depending on whether the servicer, servicer/lien holder or investor incurs the loss;
payment arrearages forgiveness for unemployed borrowers: 100% credit;
transitional funds paid to homeowners in connection with a short sale or deed-in-lieu of foreclosure for payments in excess of $1,500: 45% credit if a non-GSE investor bears the cost or 100% if the servicer bears the cost;
anti-blight – forgiveness of principal associated with properties where foreclosure is not pursued: 50% credit;
anti-blight – cash costs paid by servicer for property demolition – 100% credit; and
anti-blight – donation of real estate owned properties to qualifying recipients such as non-profit organizations: 100% credit.
As you can see, a lot of things can receive credit. In fact, up to 10% of the credit – $1.7 billion – can come from “deficiency balance waivers” – this means that the bank won’t go after borrowers after a foreclosure for a deficiency judgment. You only get 10% credit for a deficiency judgment, so that’s up to $17 billion total of waivers. But banks don’t usually find much success on deficiency judgments, so they can waive 10% of their commitment by giving up something they aren’t likely to do anyway. Wells writes in their report that they plan to use deficiency balance waivers to cover their portion of the settlement. Why not, since it reduces their commitment for basically nothing.
Furthermore, banks can get another 25% of the total credit – about $4.25 billion – on forgiving forbearance and the anti-blight provisions. So this is why the language has always said “at least $10 billion” of principal reduction. They can get credit in lots of other ways that are far less harmful to their bottom lines.
Any modifications taken after March 1 will qualify toward the settlement, and there’s an additional 25% credit for any modifications taken in the first year of the settlement. So there is a retroactivity, because presumably the judge won’t sign off on this thing tomorrow.
Here are a couple other nuggets:
• California and Florida have specific side deals with minimum dollar commitments. Nobody expects the banks to go out of their way to go over the total settlement number, so this comes at the expense of other states.
• The refinancing commitment in the settlement only covers bank-owned loans (and these are refis that are merely unlocked for a borrower, so I don’t see them as any great loss for the bank. Furthermore, they plan to do them quickly, reducing the total volume of interest rate reductions by 25% because of the benefit of doing it in the first year).
• According to Wells, the new servicing standards in the settlement “reflect a new set of best practices for mortgage servicing and not the identification of existing flaws or errors in current servicing practices.” No harm, no foul.
• Wells fully expects to be reserved for all of these issues, and so foreclosure fraud was merely the cost of doing business.
• As expected, the monitoring program starts with the servicers self-reporting on their progress. A third party monitor can request to see additional information, but that’s three months down the road, after the release of the quarterly report.
• “As part of the settlement, servicers will be released by the participating states and federal agencies from a number of servicing and origination claims.” State origination claims are basically wiped out, as I understand it. California has the ability to pursue some origination claims, but only for conduct after July 1, 2009, which is kind of a joke. In addition:
The Department of Justice and the Treasury are releasing claims under federal consumer credit laws governing loan origination. The FTC is releasing claims relating to origination conduct. HUD’s release of claims relating to origination conduct is limited to claims based exclusively on false annual certifications of compliance that are submitted to HUD, and retains the right to pursue individual loan-level violations of the Federal Housing Administration origination rules and regulations. The Department of Justice’s release from claims under the Financial Institutions Reform, Recovery, and Enforcement Act (claims involving harm to financial institutions or federal agencies based on intentional fraud or misrepresentation by a bank or its affiliates) is also limited.
I wouldn’t really call these limited releases.
• Here are some of the carve-outs on the releases: criminal law violations (not holding my breath), tax fraud, fair lending claims on origination (and servicing, in the federal releases), securitization fraud, claims against MERS, and importantly, claims of county recorders. So county recorders can pursue suits. In addition “certain existing litigation” is still eligible, and New York, Delaware and Massachusetts have the ability to pursue their lawsuits against MERS, “subject to certain limitations.”
• American Banker adds that “banks also retain potential liability related to private mortgage insurance, Wells said. The prospective settlement contains ‘a carve out under federal consumer credit laws’ that would allow the government to pursue such claims under the Real Estate Settlement and Procedures Act.”
That about covers it.