The $25 Billion (?) Mortgage Settlement

From Mortgage News Daily, 2-10-12
The press can stop speculating on the servicing settlement: a final settlement between the nation's five largest mortgage servicers, two federal agencies and 49 of the states' attorneys general (AGs) was announced Thursday. (Ok, Oklahoma, what's the deal?) The market measured this as a slight positive for banks as the uncertainty of the settlement is cleared up and banks can now focus on moving forward on foreclosures. Bank of America, JPMorgan Chase & Co., Wells Fargo & Company, Citibank, and Ally Financial, (formerly GMAC) and their servicing subsidiaries have agreed to commit a minimum of $17 billion directly to borrowers through a series of relief effort options including principal reduction.

For more granularity, the ponying-up consists of Ally/GMAC ($310 mil), BofA ($11.8 billion), Citi ($2.2 billion), JP Morgan ($5.3 billion), and Wells Fargo ($5.4 billion) for $25 billion. Servicers will likely provide up to an estimated $32 billion in direct homeowner relief. There will be $4.2 billion paid directly to the states and $750 million to the federal government. In addition, a comprehensive set of new standards will be implemented to protect homeowners from future abuses and an independent monitor will be appointed to ensure servicer compliance. HUD Secretary Shaun Donovan has also commented that the total cost may increase to $45bn if additional banks sign onto the settlement deal.

Of course this does little to stop future lawsuits against these piñatas of the financial world. Nothing in the agreement grants any immunity from criminal offenses and will not affect criminal prosecutions. The agreement does not prevent homeowners or investors from pursuing individual, institutional or class action civil cases against the five servicers. The pact also enables state attorneys general and federal agencies to investigate and pursue other aspects of the mortgage crisis, including securities cases. The settlement only covers servicer liability for robo-signing and improper mortgage servicing. Notably, it does not cover any wrongdoings associated with mortgage securitizations, MERS, or any criminal liability.

"Because of the complexity of the mortgage market and this agreement, which will span a three year period, borrowers in some cases may be contacted directly by one of the five included mortgage servicers regarding loan modification offers, may be contacted by a settlement administrator or their state attorney general, or may need to contact their mortgage servicer to obtain more information about specific programs and whether their loan qualifies. More information will be made available as the settlement programs are implemented."

Barclays Capital broke down the numbers. $17 billion will come in the form of principal reductions on first and second lien mortgages ($10 billion), forbearance modifications, and costs to facilitate short sales. Principal reductions will not be applied to any loans in agency MBS trusts, and for principal reductions on non-agency loans or in bank portfolios, the servicer must determine that the modification results in a higher NPV than foreclosing on the home. $3 billion of the settlement cost will come in the form of refinancings for borrowers who are current on their mortgage payments but underwater. $1.5 billion, per Barclays, will be used to provide immediate cash payments of up to $2,000 to borrowers who lost their homes to foreclosure between January 1, 2008 and December 31, 2011.

The modifications, refinancings, and borrower payments outlined in the settlement will be performed over three years, with 75% of each bank's target required to be reached within two years. Servicers will identify borrowers eligible for these benefits over the next six to nine months. Banks that fall short of their settlement targets by the deadlines will be assessed cash penalties. Joseph Smith, the former North Carolina Commissioner of Banks, has been selected as a third party monitor to provide oversight of the participating bank servicers.

As part of the settlement, the participating banks will be required to comply with new servicing standards, most of which likely have already been implemented or are in the process of being incorporated into standard servicing procedures. (They are too numerous to repeat here.)

If you were a bank, wouldn't you try to modify as many non-portfolio loans as possible through this program since while they only get a 50% credit, banks also escape the actual monetary costs of forgiveness? However, this may not be possible for multiple reasons, and things become pretty complicated. For one thing, Barclays notes, the bank servicers will have to follow some NPV rules to make a judgment on whether to apply a principal forgiveness modification. All of the five servicers are part of the HAMP program and have presumably already been applying NPV tests to delinquent loans and have already determined on which loans a debt forgiveness modification would make sense. This settlement cannot change that assessment. Of course, more loans could be modified through debt forgiveness due to the increased HAMP PRA incentives that were announced a few weeks ago but this settlement does not change the NPV calculation beyond that.

So what can we gather from all this? As I told one reader, the whole thing was pretty much greeted with a shrug rather than champagne corks popping, especially since it certainly doesn't end many types of lawsuits. For the impact on non-agency RMBS modifications it is small, but will keep foreclosure rolls slow for another 6-12 months. The details released specifically exclude Fannie Mae/Freddie Mac pools from this settlement but one can expect that loans in private-label pools will be affected. It seems that the banks will be required to target the $17 billion in forgiveness and other relief, and will receive a 125% credit for every dollar of forgiveness that they apply to portfolio loans - but only a 50% credit for every dollar of forgiveness applied on loans that they service but do not own. The program will have a significant impact on liquidation timelines as it is likely to slow down 90+ delinquencies to foreclosure and foreclosure to REO roll rates as servicers take some time to adjust to the new servicing standards. After that, however, we expect these rates to pick up and rise to levels higher than that experienced over the past 12-24 months.

More to follow as this unfolds...until next time.