The most important thing to note about the U.S. government's proposed mortgage modification settlement with the nation's five largest banks is that it is an opening, not closing, move in what is certain to be an extended chess match.
Federal and state officials have outlined what amounts to a broad wish-list for how banks should service loans and handle foreclosures. Banks are already resisting the 27-page plan, and some financial regulators appear to favor taking a lighter approach. Here's what the settlement would do:
- Require loan servicers to assign a single employee or company point of contact to work with borrowers who have applied for a modification
- Force servicers to consider reducing the mortgage principal for borrowers whose loans exceed the value of their homes and who have applied for a modification
- Stipulate a modification time-line, requiring servicers to notify borrowers that they have a received their request for relief within 10 days and whether they have been approved within 30 days
- Bar servicers from foreclosing on any borrower who is under review for a loan modification
- Cap fees imposed on delinquent borrowers, which experts say often pushes people into foreclosure
- Require servicers to verify that they are charging homeowners the correct loan amount
- Make banks write down at least $20 billion in loan balances for "underwater" borrowers, with the money used to fund modifications
- Offer a permanent loan modification to any borrower enrolled in a trial mod who successfully makes three consecutive mortgage payments.
- Require a third-party to examine why a borrower was rejected for modification
Crucially, such requirements would be enforceable under the law. Loan servicers that participate in federal anti-foreclosure initiatives, like HAMP, routinely ignore program guidelines. That would give state legals officials, who are driving the settlement talks, leverage to crack down on servicers that abuse homeowners.
The Consumer Financial Protection Bureau also would play a prominent role in overseeing servicers. For instance, firms would have to detail for the new financial industry watchdog how they calculate the so-called net present value of a home, the test servicers perform to decide if it is cheaper to offer borrowers a loan modification or to foreclose.
As usual, the devil is in the details. For instance, it's not clear exactly what input regulators will have in setting NPV formulas. I'm also eager to see if the proposal requires banks to reduce second mortgages. But anything that pushes banks to lower loan balances -- for borrowers who are able to make their payments, that is -- is a step in the right direction:
"If these changes are enforceable and enforced, it will make a significant difference," said Michael Calhoun, president of the Center for Responsible Lending. But he said it would require the banks to make radical changes: "This is very hands-on, time-intensive, one-off stuff."Good deal for banks
Which is exactly why the financial industry's allies on Capitol Hill are already running interference. As Rep. Patrick McHenry, a Republican in bank-friendly North Carolina, told industry rag American Banker:
It does seem that the [Obama] administration is looking at this settlement to revamp their failed foreclosure mitigation programs, which I find very troubling.But wouldn't it be even more troubling if the feds did nothing at all to stop unnecessary foreclosures? And actually, some sort of unified mortgage servicing settlement is a great deal for big banks. It would put an end to protracted legal sparring over this issue and forces state officials, who have been far more aggressive in fighting unfair foreclosures, to accommodate federal authorities and banking regulators, who have proved far more tolerant of such abuses.
The Wall Street banks that dominate the loan-servicing business also have to consider the PR implications of opposing the settlement. They'll extract their pound of flesh, but my guess is that in the end they'll come to terms.
Thumbnail from Wikimedia Commons; interior image from Flickr user Respres via Wikimedia Commons, CC 2.0
- Why Obama's New Loan Modification Plan Raises More Questions Than it Answers
- Foreclosure Express: Why the Feds Let Banks Get Away With Murder
- How to Spin a Failing Program as a Success: The Treasury and HAMP
- Time for Obama to Admit We Need New Ideas for Halting Foreclosures
- Banks Are Stealing Homes: Why Won't Obama Stop It?