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February 17, 2012

Confirmed: Banks Can Use HAMP, and Reap HAMP Incentive Payments, in Foreclosure Fraud Settlement

Posted in: Uncategorized

Shahien Nasiripour has posted two stories for the Financial Times about the intersection of the foreclosure fraud settlement and HAMP. I wrote previously about how HAMP modifications could count toward the settlement, meaning that banks would get partially paid out. Shahien confirms this.

The agreement in principle between state prosecutors, federal agencies and five leading US banks – Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial – allows the lenders to take advantage of the federal home affordable modification programme when reducing distressed borrowers’ loan balances as part of the settlement, officials said.

Last month, the Treasury department announced it was tripling the incentive payments to owners of mortgages who agree to reduce loan balances. By reducing those balances under Hamp, investors – including the banks who agreed the settlement – now will receive cash payments of up to 63 cents on the dollar for every dollar of loan principal forgiven. They also will receive additional funds when borrowers keep current on their restructured mortgages.

So if a bank reduces principal on a loan on their books, and they do it through HAMP, that bank will get, under the new HAMP rules, 63 cents on the dollar for the principal reduction, and more if the borrower stays current. And if they do them in the first year of the settlement, they get even more money as incentive.

The way that Treasury justifies this is by saying that banks won’t get credit for the subsidized portion of the loan.

Federal officials involved in negotiating the settlement defended the arrangement, pointing out that the amount reimbursed to the banks could not be directly used towards fulfilling settlement obligations.

Andrea Risotto, Treasury department spokeswoman, said this system “leverages a way to help more people”.

But people familiar with the matter told the FT that state officials involved in the talks had had misgivings about allowing the banks to use taxpayer-financed loan restructurings as part of the settlement. State negotiators wanted the banks to modify mortgages using Hamp standards, which are seen as borrower-friendly, but did not want the banks to receive settlement credit when modifying Hamp loans. Federal officials pushed for it anyway, these people said.

This is going to improve banks’ financial bottom line, however. Most of the principal reduction on these loans is going to be what amounts to air. The banks know that the loans aren’t worth the value in their portfolios, and they’ll have to write them down sometime. So if they can get partially paid out for writing them down, they’ll obviously leap at that chance. Plus, it’s much better financially to get 63 cents in cash for every dollar, but have 37 cents of write-down, than to write down at 100 cents. That hard cash can get put to use by the bank. And then there are all the “nudge” incentives, for keeping the loan current and doing it in the next year, money that the banks get that won’t detract from their credit for the principal reduction. People familiar with the preliminary terms, according to Shahien, say that with all these nudges, banks could actually turn a profit on the loans.

Shahien notes that the banks were already starting to use HAMP for principal reductions, so there was no need to give them the added benefit of getting credit for the settlement on them:

More writedowns through Hamp are likely to follow. The largest US banks are increasingly routing principal reduction modifications of their own mortgages through Hamp, according to quarterly data to September 30 from the Office of the Comptroller of the Currency (OCC), a federal bank regulator.

Since Hamp’s principal reduction initiative launched in October 2010, 82.5 per cent of principal writedowns at banks including JPMorgan, Wells Fargo, BofA and Citi have occurred under Hamp. In the four quarters preceding the initiative’s start date, just 25.3 per cent of banks’ principal writedowns on portfolio loans occurred under Hamp.

These were small numbers, but HAMP was being used as a principal reduction vehicle. And with the incentive payments getting tripled, that was bound to continue, although you’d still have to lead the lambs to slaughter, and my sense is that distressed borrowers view HAMP like the plague.

However, when you combine it with the high-profile settlement, borrowers will feel that this is a benefit to them, the banks making restitution. They probably won’t even know it’s a HAMP modification, where the banks get 63 cents on the dollar back. The design appears to be to make the embattled HAMP program look better, to get closer to its goal of 4 million modifications.

But that should have nothing to do with a mandated settlement, which is supposed to be a penalty. You can view the settlement as a way to maximize relief, or a penalty for crimes committed. Shaun Donovan and Eric Holder put out an op-ed showing that they obviously believe it’s the former; the line was “The goal of this settlement has been to benefit struggling homeowners and to do so now.” I’m all for relief, but the other part of this settlement is a penalty, a deterrent, a forcing of the guilty party to make restitution. It should not be a scheme for the banks to make money.

More from Yves.

…one other thing, this basically makes the principal reduction program through HAMP irrelevant in the near term, until the settlement kicks in. I’ve seen reports that it will take 6-9 months for the settlement to get going, to identify eligible borrowers, etc. So in that time, why would a bank do a principal reduction through HAMP, when they can wait and get partial credit for the settlement for it? I didn’t think you could make HAMP more disappointing in the near term, but they figured it out.

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