Shedding Light on AG Settlement Money Issues

Treasury’s policy director Laurie Anne Maggiano is concerned about misperceptions related to how the attorneys general servicing settlement money will affect borrowers and the marketplace over time.

“The money issue is a very misunderstood piece of the settlement,” she said during her presentation at the SourceMedia Mortgage Servicing Conference in Dallas.

While having a hard time lining up how many billions of dollars from the settlement will go where, she appeared to be sure the $25 billion “could be worth much more to borrowers” over the next three years and beyond.

Maggiano reiterated that the nation’s top five servicers have pledged to commit $17 billion for principal reduction. Nonetheless borrowers are not granted a dollar-per-dollar credit for all the principal reduction they receive. They can get anywhere from 10 cents to 35 cents credit on the dollar depending on the type of the loan, stage of delinquency and other factors.

Ultimately, when all the credits are factored in, “the expectation is that we’ll actually provide $32 billion in spending directly to borrowers,” Maggiano said.

Even though borrowers will only get credit for $17 billion of the settlement fun, over time “the leverage” would be bigger than the stated amount.

She admitted that the way the money is doled out is “very complex.”

If banks service a loan that is on their own books and they forgive principal upfront in the context of a modification, dollar-for-dollar, they get credit for it. If, instead, the servicer forgives the same amount of principal over a several month, or several-year period, they get 85 cents on the dollar.

If the servicer offers principal forgiveness on loans owned by another bank, they get about 40 cents on the dollar, depending on the specific arrangement.

The settlement includes a $1.5 billion penalty fund earmarked for foreclosed borrowers who were “the poster children for…robo-signing.”

Each of these borrowers will be granted $1,500 to $2,000. Every one of those borrowers who “truly lost their homes inappropriately” still has the right and opportunity to take an independent course of action. “None of that is taken away from them,” she said, so new lawsuits from borrowers who think they were improperly foreclosed upon may follow.

But, reiterating a point she has made in the past, Maggiano added that while “there is no question” many of those transactions were not handled properly, “most of those borrowers were significantly delinquent and would have gone into foreclosure anyway.”

Up to $3.5 billion from the penalty money will go to the state and federal agencies that provide foreclosure and housing counseling services.

Another $3 billion will be used to refinance underwater borrowers. She expects this will be in the form of principal reduction.

Over a three-year period, each servicer has agreed to provide a specific amount of money depending on the size of their foreclosure portfolios. “If they use these commitments earlier they get extra bonus points. If it takes them too long to use this money, they could face significant financial penalties,” in addition to paying the $17 billion, she said, without specifying the penalties.

If not perfect, the settlement accomplishes “a few things,” as it “clears the air, sort of,” by identifying the risk banks need to absorb so they can move forward, and establishing some very specific servicing guidelines that include the single point of contact practices, borrower outreach, borrower communication, limitations on dual tracking for pursuing foreclosures and loss mitigation at the same time.

The servicing standard guidelines designed by an interagency task force that will be announced in the coming months will help improve the process, she said.

The success of settlement efforts to assist more borrowers may also depend on whether the Mortgage Debt Relief Act is renewed. And since Treasury does not have the authority to extend the Mortgage Debt Relief Act set to expire at the end of this year, or the right to lobby for specific legislation, its director of policy called on servicers and other mortgage industry professionals to do just that.

“The very best thing one can say about the AG settlement is that it’s finally done. It created such a level of uncertainty in the market for so long that it’s been very difficult for investors, servicers, for banks, to make any financial decisions because they really didn’t know what the ground rules were going to be,” Maggiano said.

In addition, efforts to assist distressed borrowers will depend on whether the Mortgage Debt Relief Act is renewed. Treasury does not have the authority to extend the Mortgage Debt Relief Act set to expire at the end of this year, or the right to lobby for specific legislation, Maggiano said, “but we are taking a strong position on this.”

Treasury has talked to its counterparts in the mortgage industry such as the Mortgage Bankers Association, Hope Now alliance and others urging them to support an extension of the legislation, she added. “We encourage you strongly to do the same.”