Debt forgiveness likely to dominate AG mortgage servicing settlement

The state attorneys general spent 2011 trying to hammer out an agreement with the nation’s mortgage servicers over allegations of documentation mishandling.

Despite wide press coverage predicting a deal before the close of the year, a final settlement is still in the works.

In the meantime, DBRS structured finance analyst Kathleen Tillwitz outlined a breakdown of the anticipated $25 billion settlement.

In the deal, approximately $17 billion would be set aside for principal reductions, and $3 billion would be to cover the costs of refinancing for current, underwater borrowers.

The remaining $5 billion would be delivered in cash, $3.5 billion of which will help fund state and federal foreclosure mediation programs.

Under the expected settlement, “$1.5 billion will go to people who were foreclosed upon and were abused in some way during the process. The compensation payment to each borrower will range between $1,500 and $2,000,” said Tillwitz in an email to clients.

To date, more than 4 million forms have been mailed to potentially wrongfully evicted families by the Office of the Comptroller of the Currency. The OCC is overseeing the independent foreclosure review process and said on Wednesday it would air a series of public service announcements to bring attention to the search for aggrieved borrowers.

Tillwitz adds that it may be months before an agreed upon settlement can be put into place.

One of the largest arguments against widely using principal reduction is that the cost of the write-downs may impact residential mortgage-backed securities investors, instead of the servicers.

The CEOs of Fannie Mae and Freddie Mac, for example, both tell HousingWire that principal reductions do not factor into their business strategies.

Tillwitz points out that forgiving principal may create higher delinquencies when borrowers may intentionally stop paying their mortgage in order to qualify for the settlement. Higher loss severities will also occur if those write-downs still end up in foreclosure.

“Servicers will reimburse themselves for advances when they “modify” the loans to a current status as they forgive the principal which will cause greater losses to security holders,” Tillwitz added.

The AG settlement would end the government’s pursuit of mortgage servicers for alleged robo-signing activities. It does not prohibit individuals from seeking redress for the same in the courts.

Write to Jacob Gaffney.

Follow him on Twitter @jacobgaffney.

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