If the current administration gets its way, some of the country’s largest banks could be forced to pay for billions of dollars in principal reductions on loans. The administration is citing “breakdowns in mortgage servicing” as the cause for the settlement, and some state attorneys general are also asking for civil fines and modifications for troubled borrowers. The administration believes that a settlement could “help lift a cloud of uncertainty that has stalled the foreclosure process since last fall” during the robo-signer debacle. Currently, economic recovery is stalled along with the foreclosure market according to many experts.
One of the benefits of the deal according to many parties is that there would not be new government programs created to reduce principal. HAMP (Home Affordable Modification Program) has been extremely controversial and, by most accounts – including that of TARP inspector general Neil Barofsky – has been a disappointment if not an all-out failure. The administration is proposing that banks handle write-downs on loans, but that they also bear the cost of those writedowns rather than passing them on to investors. The settlement revolves largely around lenders agreeing to “eat” these losses.
However, issues such as differences of opinion on who was harmed by last fall’s breakdown – and how much – and whether or not cutting principals actually improves payment patterns hinder parties from reaching a settlement. Furthermore, there will be, of necessity, a limit on the number of mortgages that can be “cured” with any settlement. All parties are hoping to come to some sort of agreement, however, so that lenders do not have to face civil actions, smaller but myriad penalties and additional uncertainty in coming months that could leave the foreclosure market as well as the rest of the real estate market and the economy at large hanging in limbo.
Do you think that this settlement is a good solution? Can it work?
Thank you for reading the Bryan Ellis Real Estate Letter.
Your comments and questions are welcomed below.