Mortgage servicers will get credited for more principal reduction than is actually provided over the next 12 months in an apparent attempt to get servicers to act quickly, according to the mortgage servicing settlement.
The top five servicers committed to achieving $10 billion in principal reduction credits under the agreement.
For every dollar in principal written down in the first year after the servicers sign on, an extra 25 cents will be credited toward the $10 billion commitment — on top of the full dollar amount considered satisfied. The bonus incentive will likely push servicers to write down as much as possible in the first year, in order to ultimately write down less. It applies to second-lien write-downs and refinances as well.
A servicer will get full credit for every dollar written down on loans held in its own portfolio. But for every dollar a servicer writes down on loans held in mortgage-backed securities, only 45 cents will be credited, according to the documents.
This breakdown was meant to incentivize servicers to spare MBS investors from the penalties. Though the servicers have said they would write down principal where pooling and servicing agreements allow it.
The AGs, the Justice Department and Obama administration officials want the principal reductions to happen sooner rather than later. And they built in the higher incentives to urge the servicers to cooperate.
The amount of potential borrowers receiving AG settlment aid is already not expected to make much of a dent.
According to CoreLogic, there are 11.1 million homeowners who owe more on their mortgage than the home is worth. JPMorgan Chase analysts estimated over the weekend roughly 500,000 borrowers would receive principal reduction under the settlement terms, less than 5% of all those underwater.
Also, servicers will get fewer credits for writing down principal for borrowers with the deepest negative equity.
According to the agreement, a servicer will get full-dollar credit for write-downs completed on mortgages held on its portfolio with loan-to-value ratios below or equal to 175%. But servicers will only get 50 cents on the dollar in credit for reducing principal on loans with LTVs above 175%.
A servicer writing down principal on a mortgage secured in an MBS but holds an LTV above 175% will get only 20 cents of credit for every dollar written down.
Under the agreement, servicers are required to meet 75% of the entire $20 billion in relief within two years. This includes the write downs, modifications, short sales, forbearance and other actions.
Urging servicers to reduce principal and meet the obligations under the settlement as quickly as possible is a result of a growing number of sinking borrowers in an election year. The 11.1 million underwater borrowers in the fourth quarter, is up from 10.7 million three months prior.
"Negative equity will take an extended period of time to improve, and if there is a hiccup in the economic recovery, it could mean a rise in foreclosures," said CoreLogic Chief Economist Mark Fleming.