One of the things I looked at in an earlier installment of the foreclosure fraud settlement documents is how banks can satisfy their obligations by modifying mortgages they don’t own. HUD again tried to push back on this with a blog post about “myths v. facts” in the mortgage settlement (I’ll just say that I’ve taken everything I’ve written about today from the actual settlement documents). Here’s their point on that front:
Myth: The settlement will be paid on the backs of teachers, firefighter and unions because of pension or other investments in private label securities.
Fact: Participating banks own the vast majority of the mortgage loans that this settlement is expected to affect. The settlement could affect some investor-owned loans, depending on existing agreements servicers have with those investors. When banks weigh which mortgage loans to modify as part of this settlement, they will do so based on first analyzing the costs and the benefits of minimizing their losses.
If a loan modification, including principal reduction, is projected to cost the creditor or investor less than foreclosure, the creditor will earn more on that loan.
In other words, this settlement will not force investors to incur losses. That’s because any loan modification tied to this settlement will result in more of a financial return for an investor than a foreclosure would.
This has been the party line from the outset, but it’s only a guess. HUD anticipates that bank-owned loans will be modified first. They don’t say exactly why, but it’s just expected. Common sense, on the other hand, dictates that a bank will pay off their penalty with someone else’s money before they pay it off with their own.
What’s more, the NPV-positive test (which determines whether the modification would be beneficial to the borrower) isn’t enough, in most of the pooling and servicing agreements (PSA) with investors, to allow modifications. [i.e., because Investors must agree to amendments to the PSAs]. HUD thinks they have a way around that with the agreement between Bank of America and its MBS investors on an $8.5 billion settlement that allows BofA to dictate when to perform mods, but that’s not actually true, as Yves Smith points out:
But what about this investor approval that Donovan says he has? He has told both journalists and mortgage investors directly that the bulk of the mods will come from Countrywide deals and he has consent via the $8.5 billion Bank of America/Bank of New York settlement. Huh? First, it seems more that a bit cheeky to rely on a major piece of a program via a deal that has not yet gone through (the Bank of America settlement was removed to Federal court and has now been sent back to state court, and there will be discovery in the state court process, so approval is not imminent).
But second and more important, investors approved nothing. Bank of New York is trying to act well outside its authority as trustee for the 530 Countrywide trusts in the settlement. It’s tantamount to having a friend that you gave a medical power of attorney claim that it gave him the authority to sell your car and write checks on your account.
The terms of Countrywide PSAs vary, but all appear to restrict mods. The prohibitions varied by credit quality of the deal. Alt-A and early vintage (2004 and earlier) deals often barred mods completely; subprime and later vintage deals generally allowed for a higher limit on mods, with 5% the top amount across these deals. The idea was that some mods were expected in the dreckier mortgage pools. Nevertheless, all of them, as well as the few that had no caps, also required Bank of America to buy the modified loans back at par. That is something the battered Charlotte bank would be very keen to avoid doing.
Much more at the link.
At any rate, if there’s one group who does not agree with HUD that investors won’t end up footing the bill for a substantial portion of the settlement, it’s… the Association of Mortgage Investors. The trade group representing investors in mortgage-backed securities fully believes they will be on the hook for losses, and so they will challenge the settlement in federal court.
As the federal court reviews the final settlement, AMI asks that the following changes be made on behalf of all investors:
Transparency. The NPV (net present value) model incorporated into the settlement must consider all of a borrower’s debts, be national in scope, transparent, and publicly disclosed; the NPV model must be developed by an independent third-party. An incorrect NPV model likely will lead to further re-defaults and further harm distressed homeowners.
Monetary Cap to Protect Public Institutions. As intended, the settlement causes financial loss to the abusers (the bank servicers and their affiliates). Unfortunately, the settlement is expected to also draw billions of dollars from those not a party to the settlement, including public institutions, unions, and individual investors. It places first and second lien priority in conflict with its original construct thereby increasing future homeowner mortgage credit costs. It is unfair to settle claims against the robosigners with other people’s funds. While we request that it not be done, at a minimum we request that a meaningful cap be placed on the dollar amount of the settlement satisfied by innocent parties. Again, restitution should come from those who are settling these claims, and
Public Reporting. We ask that the settlement Administrator be required to make reports public and available on a monthly basis, reporting progress on clearly defined benchmarks and detailing on both a dollar and percentage basis whether the mortgages modified are owned by the mortgage servicers or the general public.
AMI complains that investors were kept out of the settlement, and that the precedents established by it are corrosive. That includes not only allowing guilty parties to pay off penalties with other people’s money, but how it will “undo contractual obligations and have second liens treated in pari passu with other senior debt.” I’ve hit this before as well. The seconds (e.g., a second mortagage or a home equity line of credit) are supposed to be wiped out before the firsts (the first mortgage) get modified. This settlement changes that precedent to the benefit of banks.
This isn’t a full-throated cry by the AMI, but it is an indication they will make a play in court for some changes to the settlement. And when you have 49 state AGs, state and federal banking regulators, and the banks themselves involved, that could open up the settlement to chaos.