The Shortcomings of the $25-Billion Foreclosure Settlement

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There is a very good article in the Los Angeles Times on Wednesday, March 7, 2012, by Michael Hiltzik following-up on the $25-billion foreclosure settlement.

Nearly one month after Washington unveiled the deal on Feb. 9, the specific terms of the settlement are still not public.  The latest explanation for the secrecy is that the parties are waiting until the settlement is filed with a federal court in Washington, which could happen this week or next.  Question is: why wasn’t the deal filed in court before or simultaneously with the announcement, as is customary with high-profile legal settlements?

One is how federal regulators are helping the banks meet the costs of the settlement.  The Office of the Comptroller of the Currency, a major bank regulator, said on the very day of the settlement announcement that it was giving the five banks in the deal a pass on $394 million in penalties it would otherwise have assessed them for shoddy, and shady, mortgage and foreclosure practices.

The Federal Reserve Board rolled $766.5 million of penalties it assessed the banks for unsafe and unsound mortgage practices into the foreclosure settlement.  The comptroller’s office and Fed write-downs are predicated on the banks’ meeting their obligations under the foreclosure deal.  The idea is that the banks will have to take actions valued at as least as much as the penalties being waived.  BofA, for example, was assessed $175.5 million in sanctions by the Fed.  If it attains credits of $175.5 million under the foreclosure settlement by modifying borrowers’ loans and taking other steps, it will owe the Fed nothing.  One might think that the banks will be required to amass $1.16 billion in credits to satisfy the bills presented by the Fed and the comptroller’s office.  Not at all.  It’s possible that the banks will be permitted to apply one dollar of performance to both sets of sanctions, which means they may be on the hook for only $766.5 million.

And just last week, the Treasury Department announced that it would pay BofA and JPMorgan Chase some $171 million in incentives it had withheld since June because of the banks’ shortcomings in dealing with homeowners under the government’s Home Affordable Modification Program, or HAMP.  The Treasury has not said what obligations it will impose on BofA and JPMorgan in return, if any.  It does say it will continue to keep an eye on the banks’ compliance with HAMP rules, which Hiltzik thinks does not strike any fear on the bankers, who were consistently flouting them before.

For each variety of mortgage relief, the banks will get a certain credit against their $20-billion target.  For every dollar of balance reduction offered a homeowner who is up to 75% underwater, for example, they get a dollar credit; for principal forgiveness on delinquent home-equity lines, the credit ranges from 10% to 90%.

The settlement’s worst flaw, said Hiltzik, may be it’s lost opportunity.  It could have been used to improve HAMP, say by mandating that the banks offer HAMP-eligible borrowers principal forgiveness, which studies show is the most effective way to keep borrowers out of foreclosure. Under current HAMP rules, such offers are optional. But such a provision would have countered the perverse incentives in the mortgage business that discourage mortgage servicers, including the five banks in the settlement, from helping homeowners avoid foreclosure.  The aspect of the lost opportunity is that the settlement, to the extent it inflicts any pain on the banks, does so entirely at the institutional level. “What’s most discouraging is that you see none of the individuals who were driving these things being held in any way accountable,”  Arthur Wilmarth, a banking expert at George Washington University Law School, says. “The only thing that will actually change behavior going forward is for the individuals who were at the center of this to be held personally responsible and be forced to give up their ill-gotten gains. Then maybe their successors might think twice.”

Despite the secrecy shrouding the overall deal, it does appear that the California-specific provisions in the settlement require BofA, JPMorgan Chase and Wells Fargo to meet a $12-billion target in California homeowner relief.  State officials believe that the provisions will encourage the banks to do more writing down of principal balances on underwater loans than they will in the rest of the country, front-load the relief more into the first year of the agreement, and to focus more on 12 particularly hard-hit counties.

Michael Hiltzik’s full article here.

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About lilynyland

Former Realtor at Coldwell Banker George Realty in Alhambra, California. Graduate Realtor Institute (GRI), Accredited Distress Property Specialist (ADPS), Short Sale & Foreclosure Resource (SFR).
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