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The $25 billion dollar settlement won’t be a huge financial blow to the big banks, and but comes exactly at the right time for them to make real changes to the way they do business.
While Fitch Ratings will monitor the efforts of the banks to come into full compliance with the rules of the settlement, it looks like mortgage servicers have already made significant operational changes in order to address problems identified in the settlement.
In June of last year, Fitch downgraded the mortgage servicer ratings of four of the five banks involved in the settlement. According to an email sent by Fitch this morning, the reasons included:
-The growing burden of managing delinquent and defaulted mortgages in an environment of heightened regulatory scrutiny;
-The increased areas of risk identified by various regulatory bodies; and
-Slower than expected pace institutions demonstrated in reacting to the evolving scope of the foreclosure crisis.
In order to fix these problems, banks started making changes long before the settlement to get their ratings back on track. It turns out, however, that the settlement calls for many of these same problems to be fixed and may provide a faster track for which to fix them.
While Fitch believes that the modification schemes included in the settlement to help borrowers avoid foreclosure – like principal reductions – could improve performance, they are concerned about the moral hazard such a practice could risk.
This concern is logical and warranted. The modification schemes may entice borrowers who would otherwise remain up to date on payments to default in order to qualify for the modifications. In the email, Fitch said this risk could potentially increase total losses to the trusts, especially if the principle reductions turn out not to be effective in reducing defaults.
The settlement is also likely to have a broad impact. While the settlement applies to the countries five biggest servicers, Fitch believes that the changes mandated by the settlement will change industry wide.
Especially since – in addition to the settlement – there have been changes to HAMP, Fannie and Freddie server guidelines, and Obama’s recent announcement of the “Homeowner Bill of Rights,” which all would institute some of the settlement’s general ideas.
While the settlement might speed things up and bring an end to the year and a half long investigation, and will resolve violations of civil law in the 49 states participating in the settlement, things may not be settled for good.
The settlement does not prevent authorities from filing criminal actions, or from individual borrowers filing lawsuits of any type; so more changes could be just around the corner if either of those things happens. So, the long-term result of this probably won’t be hashed out for several years.