The Center for Responsible Lending (CRL) has issued a critique and analysis of the February 21 interim report on the National Mortgage Settlement. The report was provided by Joseph A. Smith, Jr., Monitor of the settlement and is the third he has provided. It detailed the progress the five largest servicers have made in meeting their obligations under the settlement between March 1 and December 31, 2012.
Smith provided the chart below to summarize the various actions by the servicers and their dollar value. A summary of the report was published by MND and can be reviewed here.
CRL says that the figures provided by the monitor represent the gross dollar amounts of forgiveness or savings provided to borrowers while the settlement has a schedule that allots credits to servicers for activities that apply towards the nearly $20 billion they are required to provide under the settlement. For example, principal forgiveness on first liens for portfolio loans of 175% LTV or less is credited at $1 for each dollar of write-down, but a modification of a second lien that is more than 180 days delinquent is credited at only 10 cents on the dollar. In addition, at least 60% of the total credits must be used for principal reductions for first and second liens combined and at least half of that must be used only for first liens. Credits for deficiency waivers, anti-blight activities, and transitional funds are capped at 10, 12, and 5 percent respectively.
CRL says because of the gross amount limitations of the information provided by the monitor it is unable to determine the extent to which servicers are meeting their credit requirements. "However, it appears based on the gross numbers and credit formulas that the Monitor will apply that the servicers are making substantial progress in meeting their credit requirements."
The CRL analysis says first lien modifications are required by the settlement to be at least 30 percent of the $17 billion of consumer credits required outside of refinancing. To date servicers have completed $10.9 billion of forgiveness in gross dollars for 96,000 families and two major questions regarding first-lien modifications remain Will servicers, investors and policymakers learn from this experience whether principal reduction is a more effective modification technique than simple interest-rate reduction, term extension and/or deferment of principal, and, if so, will they continue or expand the use of principal reduction beyond the settlement's requirements?
Second liens have been a major obstacle to loan modifications and therefore a major cause of foreclosures. A first loan modification is useless if the borrower cannot sustain the second mortgage and seconds often prevent the sale of a house that would otherwise have equity or prevent short sales. Often, the only way to get rid of a second lien is through foreclosure and debt collectors attempting to collect on delinquencies or deficiencies from second liens can prevent families from getting back on their feet.
Under the agreement, if a mortgage servicer modifies a first lien and another participating bank services a second lien on the same property, that bank must modify or extinguish the second. To date, second lien restructurings have extinguished $11.34 billion in second liens versus providing only $250 million in modifications.
A question has been raised as to whether it is legitimate for a servicer to get credit for modifying or extinguishing a second lien if the servicer of the first mortgage forecloses simultaneously or shortly thereafter. CRL says there are several reasons why such credits should be considered legitimate. First, the allowed credit is only 10 cents on the dollar if the second is more than 180 days delinquent, which is likely where the borrower is so troubled that they lose their house, and second, extinguishing a junior lien is helpful if it permits the borrower to sell the house rather than go through the foreclosure process or prevents harassment by debt collectors.
The settlement clearly permits some proportion of the relief to be provided to families who are unable to stay in their homes and provides incentives for first lien modifications over second lien modifications by providing more credits per dollar of forgiveness for first lien modifications than for seconds. In addition, the Monitor will evaluate compliance with the servicing metrics, which includes testing whether the servicer accurately determined whether borrowers are eligible for first-lien modifications. If a servicer is found to have a pattern of wrongly rejecting first-lien modifications, it could face potential fines up to $1 million and $5 million and restitution for impacted borrowers.
The Monitor's first two reports on the servicers' performance which are scheduled to be submitted to the court this May and November may shed light on the question of whether servicers are providing first-lien modifications to borrowers who apply and are eligible for them, even when an associated second lien is being modified.
On the other hand, the major impetus for the form the settlement took is for borrowers to be able to keep their homes. Waiving seconds when the first lien is being foreclosed on does not accomplish this goal and was clearly not intended to be a major part of the relief provided. The issue of receiving credit for extinguishing or modifying second liens on homes where the first lien is foreclosed on should be carefully reviewed by the Monitor to ensure that borrowers can receive a tangible benefit before awarding servicers credit, particularly in instances where the servicer claiming credit owns both the first and second liens.
Waiver of deficiencies for short sales represent 43 percent of the total gross forgiveness and savings reported in the first 10 months of the settlement and home retention activities-modifications of first and second liens, including three-month trial modifications for first liens, as well as refinance interest savings- total $24.6 billion, or nearly 54% of the gross total. Almost twice as many borrowers have received home-retention relief (323,000) as short sales (169,000). Short sales as a percentage of the total consumer forgiveness have been dropping over time-from 63% in the first report to 43% in the latest.
In substance, short sales are preferable to foreclosures because they permit families to move when they are under water, spare borrowers from having to face debt collectors and spare neighborhoods vacant houses and negative spillover effects during a long foreclosure process. It is worth noting that that the servicers get credit by forgiving a deficiency after a short sale only in states that permit deficiency judgments.
It is important for servicers to approve short sales when sought by a homeowner but it is also important that servicers avoid steering borrowers who might qualify for a principal reduction modification into short sales, especially when a principal reduction modification could provide the same write-down while keeping a family in its home.
The Monitor's reports on the servicers' performance under the servicing metrics will include reviews of whether servicers are fully considering borrowers for first-lien modifications who apply and are eligible for them, and whether they are otherwise complying with rules around timelines, documentation gathering and appeals.
CRL says that concerns have been raised about what groups have received the benefits of the settlement, particularly based on demographic criteria such as race, ethnicity, income, and sub-state level geography. The settlement, unfortunately, does not require public reporting of granular data on the demographics or geography of relief activity nor have servicers provided this important information. This is clearly a shortcoming of the settlement.
