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The $26 billion settlement between government officials and the five largest mortgage servicers will exacerbate servicer conflict of interest by allowing the banks to use investor dollars to foot the bill, according to Amherst Securities Group.
The analysis comes as representatives from mortgage banks, trade groups and organizations expressed relief as the settlement with state attorneys general and federal prosecutors finally arrived.
By receiving credit for principal write-downs on the loans owned by investors, servicers can settle their liability claims with private investor money, Laurie Goodman and her team of analysts at Amherst noted.
The settlement includes $17 billion in required credits for principal reduction and other foreclosure initiatives, including short sales, anti-blight measures and borrower transition efforts. These credits are put toward loans both in bank portfolios and in private label securitizations.
"We believe that this settlement will further exacerbate the conflicts of interest in the foreclosure process, highlighting the fact that first liens are often poorly treated," the analysts said. "We are deeply concerned that such a settlement will significantly raise the cost and delay the return of private capital to the U.S. single-family mortgage market."
They compare the settlement to charging a patient, or investor, an extra fine when his doctor, or bank, is found guilty of malpractice. The already wounded patient is hurt again, and the doctor does not have much incentive to change his behavior.
"The settlement has missed the opportunity to correct some of the huge conflicts of interest that are embedded in the foreclosure process," the analysts said.
It's not all bad news, however.
"On the positive side, we are pleased to see that the changes in servicing practices address the fact that servicers often own companies that provide ancillary foreclosure services, or mark-up third-party services with no disclosure to borrowers or investors," they said.
The increased foreclosure timeline due to robo-signing issues is likely to extend further because of the settlement, Amherst analysts said, and the costs of will fall disproportionately on private investors.
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