Ranking Republican members on the House Financial Services Committee are none-too-happy about the proposed AG settlement with residential servicers, but what they really dislike is the concept of principal writedowns on troubled mortgages.
In a recent letter to Treasury secretary Timothy Geithner, Republican lawmakers say the "draft settlement" that the Department of Justice sent to the nation's five largest servicers requires writedowns of mortgage principal, "which both the House and Senate have rejected in the context of bankruptcy proceedings."
They go on to ask the secretary what "standards will govern the process by which servicers select borrowers to receive principal write downs."
Negotiations between servicers, federal regulators and state attorneys generals are ongoing and an agreement is not expected for at least two months.
In a potential AG settlement servicers are facing upwards of $30 billion in damages, according to one estimate offered Sen. Richard Shelby, R-Ala.
In their letter, the GOP congressmen point out that such penalties usually go to victims specifically harmed by misconduct. However, any proposed settlement would steer those funds to support loan modifications and principal writedowns. "What is the legal basis for using funds collected in an enforcement action to benefit parties who have not been harmed by the purported wrongdoing?" the letter asks.
The five lawmakers also raise concerns that principal writedowns will discourage private investment in the mortgage market and remove incentives for underwater borrowers to remain current on their mortgages.
The five Congressman who signed the letter include committee chairman Spencer Bachus (Ala.), Rep. Randy Neugebauer (Texas), Pete Sessions (Texas), Scott Garrett (N.J.) and Patrick McHenry (N.C.).
