Monday, February 13, 2012

Del. AG to Chris Hayes on the foreclosure fraud settlement: Settlement does nothing to change the incentivize mortgage servicer structure

Written by Biloxi

There has been so much mixed reviews from the state Attorney General settlement with the five banks on Thursday. Some people say that they are satisified with the settlement. While some people criticize the settlement saying that the deal has not gone far enough and the homeowners got screwed. Regardless of how one feels about the settlement, the settlement is not perfect. But, the nightmare is not over fo the banks because state Attorneys General and pursue the banks criminally and civil that are not part of the settlement and homeowners can sue the banks in court or be a part of a class action, or seek further review/relief from the Office of the Comptroller of the Currency (OCC) according the National Mortgage Settlement website. And it is interesting according to the National Mortgage Settlement website that the state Attorney General settlement could affect some investor-owned loans, yet the settlement will not force investors to incur losses because because any loan modification tied to the settlement will result in more of a financial return than a foreclosure. From the National Mortgage Settlement website FAQ:

Q: Will investors in mortgage-backed securities ultimately pay for part of this settlement?

A: Participating banks own the vast majority of the mortgage loans that this settlement is expected to affect. The settlement could affect some investor-owned loans, depending on existing agreements servicers have with those investors.

When banks weigh which mortgage loans to modify as part of this settlement, they will do so based on first analyzing the costs and the benefits of minimizing their losses. If a loan modification, including principal reduction, is projected to cost the creditor or investor less than foreclosure, the creditor will earn more on that loan.

In other words, this settlement will not force investors to incur losses. That’s because any loan modification tied to this settlement will result in more of a financial return for an investor than a foreclosure would.

And for the homeowners that have lost their homes? Well, there is some good news for them. According to the National Mortgage Settlement website, "Borrowers who receive payments will not have to release any claims and will be free to seek additional relief in the courts. Borrowers may also be eligible for a separate restitution process administered by the federal banking regulators."

As critics of this settlement are dissatisfied that the dollar amount is too small and not large enough to make the victimized homeowners whole, one aspect that critics are not focused on which Attorney General Beau Biden points out in his interview on Up with Chris Hayes show is that the settlement had to be narrrowed to mortgage servicing conduct in order to allow the Attorneys General to pursue criminal investiggation against the banks. But, one thing that Biden brought up that caught my attention is that the settlement does nothing to change the fundmental incentivize structure of the mortgage servicers. Biden explains that mortgage servicers are incentivize to foreclosure because the servicers know that whether a homeowner pays or not, they have to forward the mortgage payment to the investor that they service the note for. Biden then goes on to explain that after months of not receiving money from the homeowner, then the servicer can exercise their right to foreclose because they know they will be the first to receive money off the top of the foreclosure. Biden says that the state Attorneys General have not try to align the interest to leverage the best deal for the investor community and homeowners. And this explains why Biden and the other state Attorneys General have to tackle to mortgage servicers' incentive structure because clearly this structure is not in the best interest of the homeowners and investors. This will continue to be major issue in the housing crisis no matter how much money the banks fork out in lawsuits with states, federal, and well as individuals. Here is Biden's interview with Chris Hayes:

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