Realty Check

Running Robo-Settlement Numbers

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A potential $25 billion settlement between the nation’s four largest banks and the 50 state attorneys general over faulty foreclosure processing is imminent.

Or at least it’s closer than it’s been, given that we are now well over a year into the negotiations. The deadline for states to sign on was last Friday. Of course that was extended to today, and we haven’t heard anything from the negotiation team leader, Iowa Attorney General Tom Miller.

So I’m sticking with imminent.

With a deal so close, many details have “leaked,” none of which are hard and fast truths, but many of which got me to thinking, specifically when it comes to the numbers and who gets what. $25B is the big round figure. $17 billion of that is supposed to go to principal write down on troubled loans. $3 billion in, I guess you call it restitution, is supposed to go to borrowers who have already lost their homes to foreclosure. The rest would go to some kind of reserve account for state and federal foreclosure relief programs.

So how many people get what?

Inside Mortgage Finance was kind enough to do the math for me. Let’s start with the potential pool of eligible borrowers. This settlement is for “servicers,” and only bank servicers. It is not for Fannie Mae and Freddie Mac and FHA and VA and non-agency mortgage-backed securities. Bank servicers make up 32.1 percent of the market. The top 5 banks service 55.2 percent of all mortgages outstanding, according to IMF.

“The settlement covers servicing as opposed to lending. As a practical matter, who owns the servicing plays a major role in what kind of relief servicers can offer,” says Guy Cecala of IMF. “It’s much easier to provide relief on loans a bank both owns and services.”

So in theory a settlement will only cover about half of a third of mortgage borrowers, which is to say just big bank servicers and likely the loans they own. This is not to say that so-called “robo-signing” didn’t involve mortgages from Fannie, Freddie and the FHA/Va, but guess what, government doesn’t want to get into that and all the losses that could involve.

In pure numbers of borrowers, according to Inside Mortgage Finance:

850,000 supposedly struggling borrowers get principal reduction, based on proposed $20K each in write downs using $17 billion in bank money. Then two million borrowers who have already lost their homes get $1500 each, based on the $3 billion of settlement money allocated for restitution.

2,850,000 people get something, either $1500 or 20k in debt reduction. Let’s put that in perspective. 4 million borrowers have already lost their homes. 6 million more borrowers are either late on their mortgage payments or in the foreclosure process. 11 million borrowers owe more on their mortgages than their homes are worth.

Shall I get into the whole fairness issue, or have we been there oh too many times? You all may discuss…

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