State AGs Offer New Settlement Terms to Mortgage Servicers
After months of investigation, federal banking regulators issued a final cease and desist order against the 14 largest servicers that will require them to overhaul their operations.
While the regulatory order requires the servicers to overhaul their operations, it also bolsters a key bank defense namely, that the significant problems uncovered in the process have not led to improper foreclosures.
Iowa Attorney General Tom Miller blasted a study Tuesday that said proposed servicer settlement terms could cost the economy $10 billion a year. Miller, who is leading the settlement on behalf of the attorneys general, said the study was "grossly inaccurate," and noted it was paid for by the financial services industry, including some of the servicers involved in talks with the AGs.
PHFrustrated by the lack of a global settlement between state attorneys general and top mortgage servicers, federal banking regulators are expected to move forward with their ...
Four state attorneys general have sent a letter to Iowa AG Tom Miller objecting to provisions of the 27-page proposed settlement with the top five servicers.
With no clear leader stepping forward to guide the servicer settlement talks, the process has dragged out and infighting between various players has intensified.
The backlash against an aggressive mortgage servicing settlement reached new heights on Wednesday as two state attorneys general vocally opposed the proposed deal.
Many believe the government went overboard by setting unrealistic goals, a move that could backfire and give banks more leverage to fight some of the most onerous requirements.
PHThe 27-page term sheet handed to the five largest mortgage servicers last week is a detailed, dense list of requirements that, if implemented as proposed, would fundamentally change the relationship between servicers, investors and borrowers.
WASHINGTON — After months of stalemate, the state attorneys general have proposed new terms to the top five mortgage servicers that drop some controversial provisions of their first attempt at a settlement, including a push to force banks to reduce principal on thousands of mortgages.
The new offer, which was expected to be discussed at a meeting between the two sides on Tuesday, moves them closer to a final agreement, but does not detail how much state AGs are seeking in penalties for servicing issues uncovered by federal and state regulators.
Banks have privately said that they will not agree to a fine above $10 billion — far below a discredited $20 billion figure floated in the press two months ago — arguing that regulators have not provided evidence that servicing problems led to wrongful foreclosures.
The AGs are considering using whatever money they receive from banks to start a "cash for keys" program to help troubled borrowers move out of their homes and speed the foreclosure process by providing them cash incentives to leave. The funds are also expected to be used to promote mortgage counseling and offer some forebearance to troubled homeowners.
While banks have not agreed to the new terms, they do appear much more beneficial than an offer made in February, which demanded sweeping changes across the servicing industry, including principal reductions. By dropping that requirement, banks have already scored a key victory, observers said.
"It makes sense for principal reduction to be off the table because it creates a tremendous number of legal and logistical obstacles that in the context of a complex settlement are obviously difficult and distracting," said David Dunn, a partner at Hogan Lovells law firm. "It makes sense for that to come off the table for the parties to reach agreement on issues that are less difficult and controversial."
But the term sheet would still require the servicers to enact substantial changes to their practices, and could potentially raise issues in new areas.
Under the new terms, according to several sources, servicers would be required to allow borrowers that received a trial Treasury Home Affordable Mortgage Program modification — but which were denied a permanent mod — to reapply for the program.
The state AGs are also continuing to insist that servicers stop pursuing loan modifications and foreclosures at the same time, a process known as dual tracking that has drawn complaints from confused consumers.
The revised term sheet raised some new issues, including a proposed requirement for more documentation concerning the basis of knowledge for a foreclosure and notes and assignments. The state AGs are seeking to require documentation on the appropriate transfer and delivery of endorsed notes and deeds of trust at the formation of a mortgage-backed security. Essentially, servicers would have to document that they not only have positions with the MBS but document that the securitization was formed properly.
The new term sheet would also expand protections provided by the Servicemembers Relief Act to prohibit foreclosures on servicemembers who have been permanently moved to a post in a different state.
The new settlement also includes language that servicers must make borrowers aware of loss mitigation options prior to referral to foreclosure and facilitate loss mitigation applications. But the state AGs have dropped a demand that servicers provide to the Consumer Financial Protection Bureau their formulas for calculating the net present value of a home.
It remains unclear if banks are amenable to the proposed new terms. Also unknown is whether the new requirements would be extended to the rest of the servicing industry.
"I don't know where the banks are with this because they are working on their federal consent orders," said Lisa DeLessio, a partner at Hudson Cook LP. "I still think it's very unclear what this means. If the AGs reach a settlement with the banks, what will this mean for the rest of mortgage servicers? What will happen to them?"
Despite the proposed new terms, many observers were pessimistic the two sides will reach a deal anytime soon. Fed up with the delay in the process, the banking regulators already moved forward in April with a cease and desist action against the top 14 mortgage servicers.
The state AGs, meanwhile, have been beset by doubts on their own side after the initial release of their 27-page term sheet. Several Republican AGs said pursuing principal reductions were a mistake, while GOP members on Capitol Hill criticized the CFPB's involvement in the settlement process.
Some said the process was liable to continue to drag out.
"I do not believe the prospects of a full resolution in the short term are very high as there remain divergent views among all parties," said Andy Sandler, co-chair of BuckleySandler LLP.
Others said the AGs will not force a settlement until they can provide more details on what exactly the banks did wrong. While the banking regulators released an 18-page report detailing deficiencies at the servicers, the state AGs have not spelled out what issues they uncovered.
"There has to be some more due diligence and investigation before they have the credibility to enforce a settlement," said Josh Rosner, managing director of the research firm Graham Fisher & Co. "If they did a credible investigation of origination and servicing and detailed the findings of that investigation it would demonstrate how troubled the situation is and how deep the economic morass is."