California Reinvestment Coalition is bothered that the top five mortgage servicers are stressing short sales under the $25 billion national mortgage settlement when the program's goal is to keep borrowers in their homes.
The group questioned why servicers should receive credit for principal forgiveness on short sales in states where they already are barred from pursuing borrowers for the unpaid debt.
In 12 non-recourse states, including California and Arizona, borrowers cannot be personally held liable for the loss in a short sales when a home sells for less than the value of the mortgage. In those states, banks would have to absorb the losses anyway, so borrowers are not getting any added relief from the settlement, says Kevin Stein, the associate director of the California group.
"If servicers are getting credit for something that has no value, that's a problem," Stein said. "The success of the agreement depends on benefits to consumers they would not have received without the settlement. If the agreement is going to be characterized by short sales that wipe out debt that was not collectible even without the settlement, then that's not moving the ball forward."
Of the $10.6 billion in consumer relief given to borrowers in the March-to-June period, $8.7 billion came from short sales completed for 75,000 borrowers, the settlement's independent monitor, Joseph Smith, said last week in a preliminary report.
Servicers completed $5 billion in short sales in non-recourse states during the four-month period. The preliminary report included raw numbers that were not verified for their accuracy.
The settlement was designed to incentivize servicers by giving them credits depending on the type of consumer relief. Each dollar forgiven in a short sale, for example, results in a credit of 45 cents if the bank owns the loan and 20 cents if it is held by investors. Servicers get full dollar-for-dollar credit for principal forgiveness.
Still, the gross dollar amounts in the preliminary report do not reflect what will ultimately be credited to the servicers.
Laura Brewer, a spokeswoman for the Office of Mortgage Settlement Oversight, said the settlement made no distinction between recourse states, where borrowers can be pursued for unpaid debts, and non-recourse states, where they are not held liable for any legal action, or deficiency judgment, to collect the remaining debt.
The independent monitor was appointed to oversee compliance with the terms of the settlement reached earlier this year with Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial, formerly GMAC.
Short sales made up 80% of the total consumer relief offered in the initial four-month period beginning March 1, primarily because many short sales were already in process before the settlement was even announced.
In comparison with the $8.7 billion in short sales completed, servicers provided just $749.4 million in principal forgiveness of first liens to roughly 7,000 borrowers nationwide, and $231.4 million by forgiving or extinguishing second liens for 4,200 borrowers in the same four-month period.
Several state regulators and attorneys general had a more muted response to the preliminary report.
For instance, Illinois Attorney General Lisa Madigan said in a statement she is "cautiously encouraged by the initial progress reported by the independent monitor," and that she will continue "to hold banks and other financial institutions accountable for the destruction they've caused our communities."
To be sure, banks have said they are on track to give the principal reductions they have promised under the settlement.