DBRS released a report today regarding the Attorneys General settlement with servicers. The rating agency said it will continue to monitor the servicing industry regarding the final settlement terms and the effect the settlement will have on the secondary market.
"Given the magnitude of this proposed settlement and the fact that some states, such as California and New York, have dropped out of the settlement, many expect that it could take several more months of negotiating before a final settlement is put into place," DBRS analysts wrote in the report.
In this morning's note, they commented on reports that after over a year of negotiations, the state attorneys general and the five largest servicers — Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial — might have reached an agreement for the servicing and foreclosure abuses unconvered in 2010.
DBRS analysts mentioned that the proposed settlement would require these servicers to commit $5 billion in cash and $20 billion in refinancing and debt forgiveness. This is on top of complying with tougher standards on loan servicing and foreclosures.
However, this will result in the servicers being released from all claims against them by the states and federal government such as any fraudulent origination claims.
The settlement does not give immunity to the servicers for any cases brought against them by individual homeowners nor does it oblige borrowers who accept compensation under the settlement to give up their rights to sue the mortgage firm by themselves.
The rating agency broke the $25 billion settlement down to three sections: $5 billion in cash, $3 billion in refinancing for underwater mortgages and $17 billion in principal reductions.
In terms of the $5 billion cash, DBRS noted that $1.5 billion will go to people who were foreclosed upon and were abused in some way during the process.
The compensation to each borrower will vary between $1,500 and $2,000. To date, 4.5 million forms have been mailed to potentially wrongfully evicted families.
Meanwhile, $2.75 billion will go to state programs on foreclosure mitigation efforts including counseling, legal aid hotlines as well as homeowner and bank mediation.
Aside from these, DBRS said that $750 million will go to the federal government for foreclosure mitigation programs.
When it comes to the $3 billion in refinancing, the amount will be used to refinance underwater borrowers who are not behind in their loan payments, although have been unable to refinance given that the value of their homes dropped. The only refinance altervative open for these loans will be to reduce the interest rate charged on the mortgage and not to forgive any of the principal, DBRS analysts mentioned in their report.
The settlement also includes $17 billion in principal reduction. This amount will be utilized for principal and second-lien reduction for homeowners, DBRS analysts noted. If this item is agreed to, the proposed settlement should lessen the principal balances on roughly one million underwater loans to $20 billion, a $17 billion drop.
While the cost of the principal write-downs are not supposed to be borne by RMBS buyers, many industry players think that this will not be the case, DBRS analysts said.
This is because loans that have principal forgiven and then ultimately foreclosuring will probably cause higher loss severities, specifically on the subordinate tranches.
They said that the higher delinquency rates might happen given that some borrowers will intentionally stop paying their loans to have a portion of principal forgiveness.
DBRS also noted that servicers will pay themselves back for advances when they “modify” the loans to a current status as they forgive the principal that will result in more security holder losses.
Aside from the possible lawsuits that might arise from parties to this settlement, there are other MBS-related lawsuits in the news.
This morning Reuters reported that in a suit filed Friday with the New York State Supreme Court located in Manhattan, US Bank sued JPMorgan for $95 million.
The lawsuit is for securities marketed in 2005 by Bear Stearns, which JPMorgan bought in 2008, over alleged misrepresentations by the latter on mortgage loans. US bank is serving as a trustee for these loans.
US Bank, according to Reuters, is demanding that JPMorgan purchase back the mortgage loans given the alleged breaches of representations and warranties on the deal called Bear Stearns Asset Backed Securities Trust 2005-4.
The trustee also claimed that JPMorgan has not provided the underlying loan, as required by documents, so it can investigate the extent of the alleged breaches, the report stated.
Reuters also reported that German bank HSH Nordbank sued several banks such as Ally and JPMorgan for losses on $130.2 million in MBS investments.
HSH stated that these financial institutions have misrepresented underwriting standards and the underlying mortgages' quality.
Meanwhile, last Friday, ASR reported that Massasuchetts Mutual Life Insurance Co. has filed a lawsuit against Merrill Lynch, Deutsche Bank Securities, Goldman Sachs, JPMorgan Securities, and RBS Securities.
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