The settlement's final terms, released last week, offer banks incentives to write down the principal of loans they own themselves and of loans held in securitized trusts. Investors in those trusts were not a party to the settlement agreement. Now they are objecting to being forced into taking losses — to the banks' benefit — as a result of it
The settlement allows servicers to receive 45 cents of credit for every dollar of principal reductions paid for by investors. Banks will receive $1 of credit for every dollar of principal write downs on mortgages they own.
Vincent Fiorillo, a portfolio manager at DoubleLine Capital and the president of the board of the Association of Mortgage Investors, a trade group of bondholders, says the government is forcing investors to take losses even though they were not responsible for the foreclosure process abuses that led to the banks' settlement with state and federal officials.
"The banks are trying to pay these fines with our money," says Fiorillo, who wants mortgage investors to begin a dialogue with the settlement's external monitor, Joseph A. Smith Jr.
Chris Katopis, the executive director of the bondholder trade group, says it is considering its legal options, including filing a friend of the court amicus brief or suing servicers individually.
"Banks are shifting their liability to first-lien investors that were innocent of robo-signing," he says.
As part of the settlement, Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Wells Fargo & Co and Ally Financial Inc. are required to offer borrowers a total of $17 billion in consumer relief. The banks earn different "credits" for each type of aid offered for principal reductions, refinancings, and writedowns of second liens.
The settlement does nothing to change the contractual pooling and servicing agreements between investors and mortgage servicers. Some bondholders may have given banks authority to take writedowns on other settlements, but they were not a party to the $25 billion agreement between the banks and state attorneys general.
If a contract does not permit principal writedowns, the servicer cannot take them, according to an official at the Department of Housing and Urban Development, who spoke to American Banker on Friday but declined to comment publicly. (AB is a sister publication to National Mortgage News.)
All modifications made under the settlement must adhere to a "net present value" test, which assesses a borrower's eligibility for a government modification program and determines whether such a program would be more profitable for an investor than a foreclosure, the HUD official said. While investors would incur losses by writing down principal, the losses would be less than what they would suffer if a loan went into foreclosure.
But if they have to take writedowns without getting paid by the banks, mortgage investors don't want banks to get credit for them.
Bondholders are especially concerned about writedowns from Bank of America, which has privately securitized more than $285 billion worth of mortgages originated by Countrywide Financial Corp. B of A acquired Countrywide in 2008.
B of A spokesman Dan Frahm says mortgage investors had previously agreed to give the bank authority to modify loans. B of A will be soliciting 200,000 borrowers to offer them modifications as part of the settlement's terms, though Frahm says he expected about 50,000 borrowers to respond.
"I don't think the focus for us is on credits," Frahm says. "We'll be reaching more customers and potentially offering them deeper principal reduction."
He adds that B of A is reviewing the details of the program, which would address the large volume of delinquent loans in its legacy Countrywide portfolio, with "the limited number of investors who have inquired about it."
Sandeep Bordia, head of residential credit strategy at Barclays Capital, wrote in a report Friday that B of A may be able to forgive as much as $14.3 billion, for which it would receive settlement credits of $6.4 billion. Those figures assume that more than 200,000 borrowers will qualify for debt forgiveness of $100,000 on average, he wrote.