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Obama Proposal Seeks Multibillion-Dollar Settlement of Loan-Servicing Cases
By NICK TIMIRAOS, DAN FITZPATRICK And RUTH SIMON
The Obama administration is trying to push through a settlement over mortgage-servicing breakdowns that could force America’s largest banks to pay for reductions in loan principal worth billions of dollars.
Terms of the administration’s proposal include a commitment from mortgage servicers to reduce the loan balances of troubled borrowers who owe more than their homes are worth, people familiar with the matter said. The cost of those writedowns won’t be borne by investors who purchased mortgage-backed securities, these people said.
If a unified settlement can be reached, some state attorneys general and federal agencies are pushing for banks to pay more than $20 billion in civil fines or to fund a comparable amount of loan modifications for distressed borrowers, these people said.
But forging a comprehensive settlement may be difficult. A deal would have to win approval from federal regulators and state attorneys general, as well as some of the nation’s largest mortgage servicers, including Bank of America Corp., Wells Fargo & Co, and J.P. Morgan Chase & Co. Those banks declined to comment.
A settlement could help lift a cloud of uncertainty that has stalled the foreclosure process since last fall. Economists have warned that foreclosures need to proceed for the housing market to continue on a path to recovery. It’s unclear how many borrowers would benefit from a deal. Servicers have thus far had difficulty managing the volume of troubled loans.
So far, most loan modifications have focused on shrinking monthly
payments by lowering interest rates and extending loan terms. Banks, as
well as mortgage giants Fannie Mae and Freddie Mac, have been shy to
embrace principal reductions, in part due to concerns that many
borrowers who can afford their loans will stop paying in the hope of
being rewarded with a smaller loan. But some economists warn that rising
numbers of underwater borrowers will drag on housing markets and the
economy for years unless more is done to help them.
The settlement terms remain fluid,
people familiar with the matter cautioned,
and haven’t been presented
to banks. Exact dollar amounts haven’t been agreed on by U.S. regulators
and state attorneys general. Regulators are looking at up to 14
servicers that could be a party to the settlement.
The deal wouldn’t create any new government programs to reduce
principal. Instead, it would allow banks to devise their own
modifications or use existing government programs, people familiar with
the matter said. Banks would also have to reduce second-lien mortgages
when first mortgages are modified.
Several federal agencies have been
scrutinizing the nation’s largest banks over breakdowns in foreclosure
procedures that erupted last fall. Last week, the Office of the
Comptroller of the Currency said only a small number of borrowers had
been improperly foreclosed upon. But the regulator raised concerns over
inadequate staffing and weak controls over certain foreclosure
A settlement must satisfy an unwieldy
mix of authorities, including state attorneys general and regulators
such as the newly formed Bureau of Consumer Financial Protection, who
support heftier fines. They must also appease banking regulators, such
as the OCC, that are concerned penalties could be too stiff.
“Nothing has been finalized among the
states, and it’s our understanding that the federal agencies we are in
discussions with have not finalized their positions,” said a spokesman
for Iowa Attorney General Tom Miller, who is spearheading a 50-state
investigation of mortgage-servicing practices.
Last autumn, units of the nation’s
largest banks were forced to suspend foreclosures amid allegations that
bank employees routinely signed off on foreclosure documents without
personally reviewing case details. In subsequent examinations, federal
bank regulators said they found deficiencies and shortcomings in
document procedures and other violations of state law.
At issue now is a debate over who has
been harmed by improper foreclosure practices, and how much. The OCC’s
examination concluded only a “small number” of borrowers were improperly
foreclosed upon, and banks have argued that any settlement should
reflect that fact. Other federal agencies and state officials say banks
exacerbated the woes of troubled borrowers by resisting the necessary
investments in staff and technology to provide timely, effective help.
Under the administration’s proposed settlement, banks would have to
bear the cost of all writedowns rather than passing them on to other
investors. The settlement proposal focuses on pushing servicers who
mishandled foreclosure procedures to eat losses, by writing down loans
that they service on behalf of clients. Those clients include
mortgage-finance giants Fannie Mae and Freddie Mac, as well as investors
in loans that were securitized by Wall Street firms.
Bank executives say principal cuts
don’t necessarily improve payment patterns, and have told other parties
involved in the talks that principal reductions could raise new
complications. First, it will be difficult to determine who gets
reductions and who doesn’t. And even if banks agree to a $20 billion
penalty, the number of mortgages that can be cured with that number is
limited, one of these people said.
If a single settlement can’t be reached, different federal agencies
could seek smaller penalties through enforcement channels, and banks
could face the prospect of separate civil actions from state attorneys
Any settlement could be one of the largest to hit the mortgage
industry. In 2008, Bank of America agreed to a settlement valued at more
than $8.6 billion related to alleged predatory lending practices by
Countrywide Finance Corp., which it acquired that year.
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