U.S. Pushes Mortgage Deal Worth Billions In Loan Reductions | Sun Valley Real Estate

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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

processes.

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

general.

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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Aly Chiman

Aly Chiman is a Blogger & Reporter at AlyChiTech.com which covers a wide variety of topics from local news from digital world fashion and beauty . AlyChiTech covers the top notch content from the around the world covering a wide variety of topics. Aly is currently studying BS Mass Communication at University.

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