Mortgage investors call robo-signing settlement a '401(k) tax'
A panel of mortgage bond investors complained to a House subcommittee Thursday about having to bear some of the burden in a $25 billion settlement with servicers over foreclosure abuses in which they had no role.
The deal finalized in March forces mortgage servicers to provide roughly $10 billion in principal reduction via "credits." For every dollar a servicer writes down on loans it holds on its own portfolio, it gets a full dollar of credit toward the $10 billion figure. But should it write down principal on mortgages bundled into private securities, the servicer still gets $0.45 of credit.
"We believe that all principals were well-intentioned in designing a plan for relief, but unfortunately, uninvolved pension plans, 401(k) funds and mutual funds were made a party to the settlement and forced to shoulder some of the burden for the bad acts of others," said Vincent Fiorillo, MBS trader and portfolio manager at DoubleLine Capital on behalf of the Association of Mortgage Investors. "The settlement, unfortunately, has the potential to be a retirement tax – a '401(k) tax.'"
According to the agreement, servicers would have to follow pooling and servicing agreements with the bond investors before taking credit for principal reductions on packaged home loans.
Laurie Goodman, a senior analyst with Amherst Securities, testified on behalf of the Association of Institutional Investors. She said using the government's net present value test, which determines if a principal reduction is more cost-effective than a foreclosure, helps but can still be circumvented.
"The NPV test requires only that the net present value on the modified loans be slightly better than the proceeds from liquidation; it does not require the servicer to pick the modification that produces the maximum NPV of each loan," Goodman said. "It also does not require that the modification be superior to other pre-foreclosure workouts."
Iowa Attorney General Tom Miller, who led much of the negotiations described the settlement saga, which lasted roughly 18 months, in a May interview with HousingWire. Just getting a $25 billion figure, considering the long legal battle ahead was more than they could have gotten in court, he claimed. And, investors would see more benefits from a cleaned-up servicing industry and new standards, he said.
Adam Levitin, professor of law at Georgetown University, pointed out that government officials claimed because of the "credits," the $10 billion in relief could turn into as much as $32 billion in reduced principal for homeowners when the settlement was announced. Considering the 45 cents per dollar in credits, servicers would have to write down $22 billion in investor-owned loans to get $10 billion in credits.
To get to $32 billion in relief, Levitin said servicers would have to "engage in principal write-downs solely of investor-owned loans."
"The settlement provides too little relief for too few homeowners," Levitin said. "It will not clear housing markets. It will not deter future consumer fraud by too-big-to-fail banks, and does not even force the banks to disgorge the wrongful profits from their misbehavior. Despite the settlement's unprecedented size, it is a slap on the wrist for one of the most pervasive violations of procedural rights in history."
AMI challenged the settlement in court, claiming investors were not part of the negotiations even though they will take some of the costs.
Rep. Scott Garrett, R-N.J., filed an amendment to a judicial appropriations bill that would prohibit the Justice Department, which led much of the talks, from using investor funds in future settlements without allowing these parties a seat at the table. The amendment passed committee recently, and the full bill passed the House of Representatives last month.
Smaller servicers disclosed they may sign onto the settlement as well. Mortgage investors asked to be a party to those agreements, and wanted the new settlement monitor Joseph Smith to provide monthly updates on where the principal write-downs are being done and by whom.
"As long as we are affected, investors must be included in any further negotiations with additional servicers in the future," Fiorillo said.