A proposed settlement between the five largest servicers and state and federal agencies was reportedly distributed to the largest banks and to select government officials.
Amherst Securities Group (ASG) analysts said it is important to realize that this term sheet is basically a draft that has many outstanding issues. Although published reports have said that the settlement should be concluded in the next two months, ASG analysts are betting the “over” on this timeframe.
"We believe there are many facets of this term sheet that have yet to be completed, including the allocation of the monetary settlement," they said. "We would be surprised to see a quick settlement."
The firm thinks that the time period for settlement will be over two months because it remains unclear if all the State Attorneys General are on board with this term sheet. According to ASG analysts, this effort was clearly led by Iowa’s Attorney General Tom Miller. Additionally, they said that it does not seem possible that the Attorneys General from all 50 states will be agreeing to this until the dollar amount and distribution of the monetary damages are established.
Another factor is the lack of an agreed-upon dollar amount for the settlement, ASG pointed out, adding that neither is there any indication that there is a method for determining who owes what, or if the persistently mentioned amount of $20 billion to $25 billion is accurate.
ASG analysts called the term sheet "a mixed bag" since it contains both positives and negatives for non-agency investors.
One disadvantage is that it will certainly result in an extended time line, which would increase severities, they said. But, the upside is the greater use of principal reductions in loan modifications and the restrictions on default and foreclosure-related servicing fees will limit severities.
"We were particularly pleased to see the strong emphasis on principal reduction; as we believe this is a necessary step to stem the tide of foreclosures and allow the housing market to heal," analysts noted.
Another drawback that they mentioned is the lack of any enforcement authority. This is specially crucial since the term sheet reiterates many existing laws and contractual requirements, which are clearly not being executed, they said.
Additionally, they said that MERS is mentioned but is not addressed. "Foreclosure-gate, robo-signing issues and title transfer issues were the reason the Attorneys General began their investigation," analysts wrote. "This issue is too large to be ignored."
According to analysts, the initial settlement document also proposes better transparency and accountability. However, it somewhat falls short of the transparency level many buyers would like to have.
Furthermore, the added transparency, they said, is not made available to investors. The servicers will have their systems audited for accuracy and completeness by the servicer’s independent auditor and the results will be available to the Attorneys General and Consumer Financial Protection Bureau (CFPB) upon request, data that investors can be provided with as well.
Since servicers, they said, will provide the Attorneys General and the CFPB with regular state-specific data reports and compliance with this agreement, specifically on loan modifications, then why not offer these reports to investors. Borrowers, they noted, would receive better detail on default and foreclosure-related servicing fees, which can also be extended to investors.
They also said that it was not explicitly stated that servicers will bear the clean-up costs. Analysts said that they would want this clearly stated in the document.
Investor Involvement A Must
Investors need to be actively involved in offering input on this settlement, ASG analysts said. It also has to be clear in the settlement, they added, which costs will be borne by the investors and by the servicers.
"Investors need to make their voice heard; our analysis indicates there is still time," analysts wrote.
They cited the 2008 settlement between Countrywide, which is currently part of Bank of America, and a group of State Attorneys General, which they said investors should have learned from. In this instance, Countrywide said it will modify up to 400,000 loans. The costs of these modifications were shouldered by investors inspite of the clauses in Countrywide’s trust documents that said the firm must purchase, at face value, any mortgage that it modifies.