The second report from the Office of Mortgage Settlement Oversight has arrived, and it shows a continuation of one trend, tempered by the first batch of consumer relief in the form of actual principal reductions.
The settlement monitor, Joseph Smith, continues the troubling tactic of identifying gross consumer relief as if that number is meaningful vis-a-vis the settlement. He makes the distinction in the beginning of the report, but I assume many reporters will gloss over it:
As was the case with my prior report, the consumer relief activities discussed in this report represent gross dollars that have not been subject to calculation under the crediting formulas in the settlement agreement. Therefore, the $26.11 billion in cumulative consumer relief reported here cannot be used to measure progress toward the $20 billion obligation in the settlement. As also was outlined in my first report, neither I nor the professionals working with me have con?rmed these figures. No credit will be awarded to a servicer until I, as Monitor, am satisfied that the servicer has met its obligations.
In other words, there’s a formula for consumer relief eligible under the settlement, and it hasn’t yet been applied. So we don’t know how much progress the banks have made with honoring the settlement. And we don’t get enough detail in this report to make the calculation – some principal reductions will not get full credit, because the loan type isn’t in the banks’ portfolio, but a private investor’s portfolio, for example.
Still, we have this $26.1 billion number. What does that include?
• As with the last report, the majority of the consumer relief comes from short sales. That’s true in California as it is in the rest of the country. Now, describing short sales as “consumer relief” stretches the term a bit. As we’ve gone over, a short sale occurs when an underwater borrower is allowed to sell a home for less than they owe on their mortgage, and the bank forgives the remaining debt on the loan. If the bank refused to do this and instead foreclosed on the home and sold it at auction, they would recoup LESS of the cost of the mortgage. So short sales are really mutually beneficial for borrower and lender, though more so for the lender. The borrower still ends up without a home, they still actually get a hit to their credit report, and if the Mortgage Forgiveness Debt Relief Act is not extended by Congress at the end of the year, the debt forgiven in the short sale will be seen as earned income for tax purposes. And this is considered “consumer relief”!
$13.13 billion of the $26.11 billion in relief stated here comes from short sales. Not much of this will actually count toward the settlement, so I don’t know why they keep including this number. And it’s not what anyone means when they talk about a settlement that “helps keep people in their homes.” Short sales do the opposite of that. They’re a sale, often a forced sale, of the home. Katie Porter notes:
Short sales should be reserved for homeowners who couldn’t afford to live in a home even with a lower principal or for people who need to move, said UC Irvine law professor Katherine Porter, who was appointed by the state attorney general’s office to monitor the deal.
“I am pushing hard to make sure that … short sales are being used for families for whom other options are really not available,” Porter said.
It’s difficult to see whether that’s the case.
• On the other end of the spectrum, this report, which covers the time period between March 1 and September 30, 2012, shows the first set of actual principal reductions resulting from the settlement. The banks are obligated to honor 60% of their credit in the settlement from first and second-lien principal reductions (which, read another way, means that 40% can go to other things, like short sales, as well as routine actions like bulldozing homes and donating homes to charity that banks normally engage in).
The statistics show that 21,833 borrowers have successfully completed a first lien principal reduction, totaling $2.55 billion in relief, for an average of $116,929 per borrower. In addition, another 30,967 borrowers are in active trial first lien modifications, worth another $4.19 billion of relief. Second lien modifications, on a home equity line of credit or other second loans, total $2.78 billion for 50,025 borrowers. Many of these have just been written off entirely. There are a number of other types of relief counted toward that $26.11 billion total (refinancing, forbearance, and other programs), but the bulk of it comes from the principal reductions and the short sales.
• As we noted previously on the principal reductions, the banks in their own filings indicate that they are paying off a substantial amount of these penalties with investor money. Bank of America revealed that over half of their principal reductions are on loans they serviced and did not own. So mortgage backed securities holders are paying BofA’s penalty in around 60% of the cases. For JPMorgan Chase that number is around 55%. The other three banks in the settlement – Wells Fargo, Citi and Ally/GMAC – have not released these figures.
• The report also gives the first set of details about the servicing standards, the set of new rules for these servicers. There isn’t much detail on compliance here, but the report does list professional submissions from consumers, basically complaint forms over some aspect of the settlement. According to the report, “More than 70 percent of the consumer submissions relate to complaints about problems in the loan modification process or a failure to modify or refinance a loan, customer service and documentation problems with a foreclosure, bankruptcy or loan file.” That’s on roughly 3,000 complaints overall. The report also notes problems with dual tracking, where a servicer negotiates a modification while placing the borrower into foreclosure. In addition, Joseph Smith writes, “I also am seeing an increasing number of reports concerning successor servicers or sub-servicers that are taking over the account administration from one of the Servicers.” This is a classic bait-and-switch for mortgage servicers, selling off the servicing rights right before completing a modification.
Smith has received 350 professional submissions from attorneys and housing counselors identifying complaints and the like, and “Roughly 80 percent of the professional submissions involved problems encountered in the loan modi?cation process, customer service issues, or problems in the foreclosure process,” including dual tracking. This doesn’t paint the best picture of servicers as far as their business is concerned.
Overall, Smith looks on the bright side and reports “continued progress” on the settlement. I see half of the relief going to short sales, and half of the principal reductions paid by someone other than the banks.