Here’s the second installment in the review of the foreclosure fraud settlement documents. Exhibit D in this document lays out the menu for credits toward the settlement. When we talk about credits, the federal government and state AGs want you to assume that means a set amount of principal reductions that the banks will grant. But in reality, the banks can employ a variety of strategies to receive credit toward the settlement, including a number of routine actions they would probably undertake whether there was a settlement in place or not.
First, let’s look at the top line. Banks get a dollar-for-dollar credit on first-lien principal modifications on bank-owned loans when the borrower is under a 175% loan-to-value ratio. [E.g., you still owe $175,000 on a property whose current market value is only $100,000.] Any principal reduction on a portion of a loan over 175% is given half-credit. This stops the bank from getting credit on loans likely to default anyway. Banks can also get $0.40 credit on the dollar by forgiving forbearance on modifications they have already done. Forbearance occurs when a certain amount of principal is shifted to a balloon payment at the end of the loan. If the bank forgives that, they get partial credit, even though that doesn’t affect a monthly payment in the near term whatsoever.
When the loan is not owned by the banks but by investors in mortgage-backed securities, the credit for a modification drops to 45 cents for each dollar of principal reduction. There’s a provision in the rules that states “First liens on occupied Properties with an unpaid principal balance (“UPB”) prior to capitalization at or below the highest GSE conforming loan limit cap as of January 1, 2010 shall constitute at least 85% of the eligible credits for first liens (the “Applicable Limits”),” which is supposed to assure that the bank’s portfolios will be the primary source of first-lien write-downs. But as Yves Smith explains, there are ways to structure it so that the number of write-downs may conform, but the value is weighted more heavily on those investor-owned loans. After all, if you can get any credit at all with someone else’s money, you’re going to do it. (more on this in a later post)
If a first lien gets written down, and one of the five banks covered by the agreement owns the second lien, that second lien (typically a home equity line of credit) must be written down on equal terms. It doesn’t have to be extinguished entirely unless it’s 180 days delinquent. This violates standard priority, which would be to wipe out the second liens first before modifying the firsts. Since banks own most of the second liens, this gives them an implicit subsidy, and by improving the chances of the first lien to perform, it enhances the ultimate value of the second liens, giving an additional bank subsidy. “Performing second liens” (up to 90 days delinquent) actually get $0.90 on the dollar credit, so banks will have a lot of incentive to make their seconds current through whatever alchemy. More delinquent second liens (up to 180 days) get $0.50 on the dollar credit, and second liens delinquent over 180 days get $0.10 on the dollar.
Another part of the document explains that any modification under any government housing program can qualify under the settlement credits:
Eligible modifications include any modification that is made on or after Servicer’s Start Date, including:
i. Write-offs made to allow for refinancing under the FHA Short Refinance Program;
ii. Modifications under the Making Home Affordable Program (including the Home Affordable Modification Program (“HAMP”) Tier 1 or Tier 2) or the Housing Finance Agency Hardest Hit Fund (“HFA Hardest Hit Fund”) (or any other federal program) where principal is forgiven, except to the extent that state or federal funds paid to Servicer in its capacity as an investor are the source of a Servicer’s credit claim.
iii. Modifications under other proprietary or other government modification programs, provided that such modifications meet the guidelines set forth herein.
Presumably those programs weren’t all going to shut down. So banks doing what they’ve been doing, meeting the minimum requirements of those other programs, will help them complete the settlement requirements.
And that’s true of several other measures by which banks can get settlement credit. For example, giving transitional funds to homeowners when they do a short sale or a deed-in-lieu foreclosure:
Servicer may receive credit, as described in Table 1, Section 3, for providing additional transitional funds to homeowners in connection with a short sale or deed-in-lieu of foreclosure to homeowners for the amount above $1,500.
That gets them full credit if it’s a bank-owned loan, and partial credit ($0.45) if the investor makes the payment. So the idea that investors won’t pay for any of this is just a lie. They can get up to 5% of the total credit, or $850 million, off these measures.
Here are some of the other measures that can earn the banks settlement credit:
• Deficiency judgment waivers. Some loans are recourse, which means the bank can go after the borrower if the foreclosure sale comes up short of the assessed value of the home. They rarely do this, but now, they can get credit for deciding to waive deficiency judgments. This is only on loans where a “Servicer has a valid deficiency claim,” and I’m sure they’ll adhere to that. They only get $0.10 on the dollar for this, but it can stand in for 10% ($1.7 billion) of all credits. I fully expect all 10% to be used.
• Forbearance for unemployed borrowers. This is an existing program that even the GSEs (Fannie and Freddie) have bought into, but the banks can get settlement credit for doing it. Even if they do it under the existing program, they get a nickel on the dollar.
• Anti-blight provisions. This includes forgiveness of principal on a loan where the servicer has not pursued a foreclosure, costs from the servicer for demolishing property, and the piece de resistance…
• Donating homes. That’s right, banks get settlement credit for “REO properties donated to accepting municipalities or non-profits or to disabled servicemembers or relatives of deceased servicemembers.” They get dollar-for-dollar credit for that. Why is this so infuriating? Because if you follow housing you know that servicers donate homes all the time. It’s part of their public relations strategy. Here’s a story on Bank of America donating 75 homes in Kansas City. Here they are donating homes in Boston.
The anti-blight provisions, which donating homes falls under, can make up 12%, or $2.04 billion, of the settlement.
Now we know why federal officials hedged and wrote that “at least $10 billion” of the settlement would be devoted to principal reduction. By my calculation, the banks can satisfy over 1/4 of their settlement obligations through things like donating and bulldozing homes, waiving deficiency judgments and paying transition assistance for borrowers, things they would already do in the normal course of affairs.