Since the robo-signing discovery in October 2010, the Attorneys General of 50 States have been looking into the matter and developing a settlement arrangement with the mortgage servicing Industry.
Well, this week we got to see a Proposed Settlement, which has been sent to the relevant parties who will be impacted by the terms of the settlement.
It took the robo-signing discovery to get someone (50 State AGs) to act since Treasury was unwilling to request from Congress any type of legal authority to levy fines and penalties. It must also be noted that Congress did not write legislation to force Treasury to act, giving them the enforcement authority required to correct the problems at the servicers.
Then, Wednesday March 9, the House Financial Services Committee voted to end HAMP. This action told the American people and the real estate market as a whole, ‘You are on your own – Good luck!’ The vote sends a clear message to the servicers and Treasury that they have nothing to fear in the future from Congress. That’s why the AG vote today is ironic, since much of the AG’s settlement proposal is based on HAMP guidelines with regard to mortgage modification efforts.
So, where does this leave us?
The good thing about this proposal is the AGs have listened to all the problems and shortfalls with regard to connectivity, processing, underwriting, transparency, reporting, filings of legal documents and timelines — to name a few. There has been ample evidence, with reports from SIGTARP, COP, GAO, the Consumer Advocacy group and others, of ineffective efforts put forth by this industry in the past two years. After repeated appeals from all segments including Congress to the servicers to perform better, it has not happened.
Looking at the proposal, many guidelines and directives under HAMP are incorporated, which if done from the beginning could have achieved hundreds of thousands of sustainable modifications. Sticking to the timeframes under HAMP would have moved those applicants who did not qualified on to other alternatives. All this could have been achieved with HAMP if done properly. The AGs now feel they can force the servicing industry to do something they have not been able or willing to do for over two years.
Is the belief behind this proposal that because the AGs are telling them what to do in a settlement the servicing industry will listen? The servicing industry has not even stated they would participate in any settlement, though it has been reported that the AGs hope for an agreement in two months. Yet millions of struggling American homeowners only have this settlement as their last resort for saving their homes – with this action from the House.
But, how can we hope this plan to succeed when the same fatal flaw in HAMP exists in the AG’s proposal?
Under the new settlement proposal, all underwriting remains in the hands of the servicer. However, there is a component in the proposal for escalation: if a homeowner is declined they have the right to escalate the file to a supervisor. If there is still a disagreement, the declined file will go to a “separate division” within that institution for an internal review. This internal review committee will have the authority to override the original loss mitigation division. Up to this point, nothing has changed except for the timeframe in which this process has to be completed, which is 30 days. There is a third component of the escalation process: this internal review process will be monitored by the Attorneys General and CFPB.
There is a principal reduction component to the proposal, however it does not attach itself to a formula — the proposal states that it’s still up for discussion at a later date.
Since so much of the guidelines set forth in this document are based on HAMP, maybe it would have been reasonable to employ principle reduction in the waterfall approach that already exists. The concept of reducing principle to market values would be a danger to real estate values for many years. Regardless, here we are two years later, millions of people foreclosed upon, many of which may have been preventable, and we now have a plan.
The proposal does call for fines and penalties, which is what has always been needed. But when would this settlement become active and how much longer after that would fines be levied? This is not specified in the proposal. Reports say there may be an agreement in two months. The number for foreclosures fell in January to under 300,000. If it takes two more months – assuming the servicing industry signs on to the settlement we are speaking about – an additional 550,000 + homes will go into foreclosure. The proposal does not give a timeframe for these requirements to be implemented. Historically, when the Treasury added a major directive to HAMP, the servicers requested six month to implement their operational procedures. If that is again the case, we are looking at eight months, which means another million+ homes, not including what is currently in the pipeline.
It appears – between HAMP being killed and Treasury being out of the way – that the AG’s settlement is our only hope. Best case scenario: the servicing industry will have a free hand for another eight months. Can the real estate market, the American people, and the overall economy absorb the damage?
Thanks to House Committee, it has no choice.