The five largest bank servicers — Bank of America, Wells Fargo, JPMorgan, Citigroup, and Ally Financial /GMAC — today announced a $25 billion settlement with 49 state attorneys general (except Oklahoma), the U.S. Department of Justice, and the Department of Housing and Urban Development (HUD).
It was notable that both California and New York ultimately decided to join the settlement, a report released this afternoon by Barclays Capital analysts said.
The cost of the settlement across the five banks is as follows : Ally/GMAC: $310 million;
Bank of America: $11.8 billion; Citigroup: $2.2 billion; JPMorgan: $5.3 billion; Wells Fargo: $5.4 billion, analysts reported.
HUD Secretary Shaun Donovan has also stated that the total cost can go up to $45 billion if more banks sign onto the settlement deal (see related
Amherst Securities Group (ASG) said in report also released this afternoon that there are a couple of positive factors in the settlement concerning the treatment of ancillary foreclosure services.
However, the deal wil cause the liquidation timeline to probably extend further. They noted that the deal forces private-label investors to bear the costs of "shoddy documentation" via these longer timelines.
ASG analysts added that the Attorneys General Settlement does a "disservice to private-label investors."
The biggest servicers, ASG analysts said, through this deal are allowed to settle their liabilities for robo-signing utilizing other peoples’ money. In other words, they are getting credit for principal writedowns on loans owned by investors.
Other market participants agreed. "At the end of the day it isn't the banks that are going to be paying out, but the mortgage trusts," said one mortgage litigation consultant. "Guess who's in line to take the hit, the same securitization investors that are already crying fraud."
Furthermore, analysts said that these banks/servicers are already conflicted as they may possibly own the second liens and therefore the best outcome for such servicers is a huge write-down on the first lien in order to maximize the value on the second.
"We believe that a large error was made in initially failing to respect lien priority in the modification process," analysts said. The settlement will, ultimately, cause first lien mortgages to be more costly with investors realizing that they will be less well protected than their lien priority would indicate, ASG analysts stated.
Ultimately, the AG settlement can significantly raise the cost and delay the return of private capital to the U.S single-family mortgage market, ASG analysts warned.
"The AG Settlement is like charging a patient an extra fine when their doctor is found guilty of malpractice," they said. "The already wounded patient is hurt again, and the doctor does not have much incentive to change his behavior."
They concluded that the settlement has missed the chance to correct "some of the huge conflicts of interest that are embedded in the foreclosure process.
Barclays' Kinder View
Meanwhile, Barclays analysts said the details released today specifically exclude Fannie Mae/Freddie Mac pools from this settlement. They expect that loans in private-label pools will be impacted.
They believe that the banks will have to target the $17 billion in forgiveness and other relief and will get a 125% credit for every dollar of forgiveness that they apply to portfolio loans. However, this will only be a 50% credit for every dollar of forgiveness applied on loans that they service but do not own.
Barclays analysts said that from a purely economic view, it would seem that banks can try to modify as many non-portfolio loans as possible via this program since even though they only get a 50% credit, they also do not have to deal with the actual monetary costs of forgiveness.
However, analysts also said that this might not be possible for several reasons they listed.
One is that the bank servicers will have to follow some 'net present value' (NPV) rules to decide whether to apply a principal forgiveness modification.
All of the five servicers are part of the Home Affordable Modification Program (HAMP) and should have already been applying NPV tests to delinquent loans and have determined on which loans a debt forgiveness modification actually makes sense.
According to Barclays analysts, this settlement cannot change that assessment. Clearly, more loans can be modified via debt forgiveness because of the increased HAMP Principal Reduction Alternative incentives announced earlier, although this settlement does not change the NPV calculation beyond that.
Barclays analysts also said that buysiders are better organized today than they were in 2008-2009 when some of the Countrywide Financial Corp. settlement costs were passed on to them. These buyers would likely take action directing the trustee/servicer to stop large-scale modifications if they view that the modifications do not serve their interests.
Finally, the $17 billion in principal forgiveness modifications and other relief might not have a big impact on the banks' financials if they are applied to delinquent loans where banks have probably already taken some markdowns. These banks are also not compelled to perform negative NPV mods and might see some value in modifying the loans anyway.
Overall, analysts think that this settlement will have a comparatively modest impact on non-agencies when it comes to the pace and composition of modifications.
"We think that this, along with the previously announced enhanced HAMP incentives, will increase principal forgiveness modifications somewhat and potentially also lead to a small increase in overall mod rates but is unlikely to trigger widespread mods," they said.
However, analysts said that the program will have a considerable effect on liquidation timelines since it is likely to slow down 90+ delinquency-to-foreclosure and foreclosure-to-REO roll rates with servicers taking some time to adjust to the new servicing standards.
But, after that, analysts think that these rates should pick up and rise to higher levels versus that seen in the past 12-24 months.
