The recent announcement that Bank of America cut a "side deal" to earn extra brownie points (and lower penalties) in the robo-signing settlement with state attorneys general touched off a round of criticism. As reported in The Wall Street Journal, investors are squawking about making them pay for the errors of the loan servicers by threatening bond principal repayments through mortgage principal reductions. In response, The White House claimed that the settlement terms would not require mortgage principal reductions in each case.
The Obama administration official said that principal reductions will be done only when there is a benefit to investors, meaning that the cost of the principal reduction will be less over time than taking the loan through foreclosure, and the principal reduction is done in accordance with investor contracts. "The misunderstanding somehow that the investors will be paying the banks' share is just false," Secretary of Housing and Urban Development Shaun Donovan said when the deal was announced last month.
Wait a minute: isn't that analysis supposed to be happening anyway? Isn't that what savvy servicers like Ocwen were being praised by the "main stream media" for three years ago? If they're already doing it, what does the settlement accomplish?
We suspect that what it accomplishes is "encouraging" (wink-wink, nudge-nudge) servicers to write down the principal balances of the loans they hold in portfolio. Investor-owned loans will be handled according to a net-present value analysis outside of this "settlement process," which is what the Wall Street Journal's article's quotations from other servicers, such Ally, suggest. In turn, by "taking one for the team," the loan servicers will give the Obama administration and the attorneys general political talking points in an election year.
Interestingly, the government owned "conserved" GSEs aren't jumping on the principal write-down bandwagon. In fact, they've driven that wagon into the ditch.
[FHFA chief Edward DeMarco} firmly holds his position on principal writedowns:
There is no question that underwater borrowers in California would benefit from other taxpayers across the United States paying off the underwater portion of their mortgage debt. My obligation to those taxpayers, including those living in California, is to ensure that the assistance offered to borrowers facing difficulty in making their mortgage payments maximizes the opportunity to assist those borrowers at minimum cost to taxpayers.
The numerous foreclosure avoidance options offered to borrowers whose loans are owned by Fannie Mae or Freddie Mac, including multiple loan modification options, do just that. We will continue to consider alternatives as they are proposed, but I will not further delay foreclosures provided those borrowers have been given a meaningful opportunity to avail themselves of a loan modification or some other suitable foreclosure avoidance alternative.
So, the state and federal governments stick it to the banks' shareholders but won't stick it to the taxpayers, at least not so openly, in an election year. We get it.
What we don't get is how mandating principal write-downs on underwater mortgages is a logical penalty, or appropriate remedy, for false attestations in foreclosure documents. We understand--and support--fining the lenders and individuals involved, and prosecuting those offenders who've committed perjury or other criminal violations. Those are punishments appropriate to the offense. As for the "injured parties," why not require that either their foreclosures be halted or set aside (if possible) or that they be identified and directly compensated monetarily by the offending servicers on a case-by-case basis? Aren't those more logical, equitable remedies that fit the offense?
Giving people who don't pay their mortgages a benefit that people who pay their mortgages do not receive may serve a larger economic policy agenda, but shouldn't that policy be implemented openly through legislation, either at the state or federal level? Oh, yeah: that would involve spending tax dollars and no one has the political will to do that in an election year, likely because (A) supporters couldn't get the votes to pass such legislation in the first place and (B) even if they did pass it, it would be unpopular with the majority of taxpayers who don't want to fund such relief, as Ed DeMarco correctly observes. Therefore, it's a backdoor means of creating popular "buzz" in 2012.
The icing on the cake is that, according to a Brookings Institution economist, only 5% of the nation's 11.1 million underwater homeowners would get a write-down under the terms of the settlement. That may or may not be an understatement, but it's my guess the final number is not going to be substantially higher once the dust settles. Then again, none of this is about anything other than smoke and mirrors, is it?