Mortgage servicers may be wary of entering into a global settlement with the state attorneys general because whatever deal is struck between the two parties would not be binding on the Consumer Financial Protection Bureau.
Once the CFPB is up and running in July, the new bureau will have "primary" enforcement authority over the large banks and their servicing shops, according to industry officials.
The CFPB can issue cease and desist orders for past violations and require restitution, payment for damages and civil money penalties.
"The bureau will have broad authority to write servicing rules," according to Anne Canfield, president of Canfield & Associates. "Servicers may not see any advantage in agreeing to restrictions that could change soon," the Washington consultant said.
Servicers may face up to $20 billion in monetary damages if a settlement with the AGs and federal regulators is consummated — with a good portion of the funds going toward principal reductions on loan modifications. (The $20 billion figure is an estimate and over the past week many in the industry scoffed at the figure because it would take more capital out of the banks.)
Still, analysts at Amherst Securities Group estimate $20 billion could fund $20,000 in principal reductions on 1 million mortgages. "While this amount will not fund all the principal reductions that are needed, it will certainly go a long way," ASG analysts say in a new report.
Amherst notes that MBS investors would "bear the remaining costs of principal reduction modifications. Clearly, investors would rather see a net present value positive principal reduction than a foreclosure, and are willing to take the write-down."
