The National Mortgage Settlement: One Year Later

By Tom Miller, Iowa Attorney General

April marks the one year anniversary of the signed Consent Judgments in United States of America, et al, v. Bank of America, et al. The court orders formally implemented the historic National Mortgage Settlement involving the attorneys general of 49 states and the District of Columbia, our federal partners led by the U.S. Department of Justice and U.S. Department of Housing and Urban Development, and the nation’s five largest mortgage servicers.

At the time we announced the enforcement, we made what we felt was a conservative estimate of $34 billion for the benefits to homeowners over 36 months. In February 2013, Joseph A. Smith, Jr., monitor of the National Mortgage Settlement and former North Carolina commissioner of banks, issued his third settlement progress report showing that we realized $45.8 billion in benefits in the first 10 months, helping 554,389 homeowners.

It is clear, based on the monitor’s latest report, that the benefits have already far exceeded our expectations in the three main categories of homeowner benefits: first lien reduction, second lien reduction, and short sales.

Principal Reduction

Our first priority was principal reduction. The agreement required at least $5.1 billion in first lien principal reduction. In 10 months, more than double—$10.9 billion—has been achieved. The agreement requires $17 billion in total credits. Principal reduction alone could approach that amount.

Some voiced opposition to principal reduction. They thought that once it began in earnest, many borrowers who could afford to make their mortgage payment would strategically default, thus endangering the whole mortgage market. That has simply not occurred. Rather, as a result of principal reduction, more people are staying in their homes and are making sustainable payments.

Our hope and plan was that, because of the National Mortgage Settlement, it would be apparent that principal reduction works and would be employed beyond the Settlement. Indeed, our vision was that the Settlement would be a catalyst for the use of principal reduction in other loan modifications. That is starting to occur. For example, approximately three-quarters of the eligible underwater homeowners entering the Home Affordable Modification Program (HAMP) in 2012 received some form of principal reduction.

Second lien reductions are also far beyond expectations at $11.6 billion. Second lien reductions help homeowners stay in their homes and ensure an element of fairness for the holders of the first lien. It is likely that there will be enough first and second lien reductions to satisfy the homeowner benefits requirements under the Settlement’s consumer relief credit structure.

Short Sales

There has also been a surge in the numbers of short sales—$19 billion worth (it is likely that the servicers won’t need credit from short sales to fulfill their $17 billion consumer relief requirements). This is a good outcome. Short sales are initiated by homeowners, not the banks, and are a better alternative to foreclosure. With short sales, homeowners do not owe the deficiency and are given a fresh start without debt collectors hounding them for years to come.

Short sales allow homeowners the freedom to move in situations that may involve taking a job elsewhere or changing family needs. Neighborhoods are spared the empty homes and home value losses associated with foreclosures. The housing market itself is better off. Investors lose less money than they would in a foreclosure.

Reforming the Mortgage Servicing System

The servicing of home mortgages is a one-on-one interaction. The mortgage servicing system was designed to collect monthly payments, not to modify loans, creating at least a somewhat anti-loan modification culture at banks. Distressed homeowners were under terrible pressure of all types, causing some to hunker down and be reluctant to engage banks on loan modifications. These factors made for enormous challenges in the mortgage servicing business in 2007-2008.

The banks handled the challenges badly. They lost documents, missed deadlines by a mile and, in most of their loan modifications, did not reduce the monthly payments. They turned a difficult, challenging environment into a dysfunctional system.

We are trying to reform this dysfunctional system. This is one of the most difficult challenges we have ever undertaken. There are three fundamentals we are using to reform this system:

1) 300 servicing standards that control how home mortgage servicing is done.

2) 29 metrics, many with multiple parts, to test the most important standards.

3) An independent monitor, Joe Smith, to oversee and implement the standards and metrics.

The 300 standards took effect on a staggered basis with all effective on Oct. 1, 2012. The metrics followed the standards in the following quarter.

Thus far, we have observed that:

1) It is still somewhat early in the implementation process since some key standards became effective in the fourth quarter of 2012, with metrics testing in the first quarter of 2013.

2) We have seen some progress, but we need to see more.

3) No other public body or process would have been able to reform this dysfunctional system in the time frame. In the future, perhaps the U.S. Consumer Financial Protection Bureau or the Office of the Comptroller of the Currency could.

The attorneys general continue to work with homeowners, the monitor and the banks in reforming this system. The next 12 to 18 months will reveal how well we are able to meet one of our most difficult but very important challenges.

More information about the mortgage settlement is available at www.nationalmortgagesettlement.com. Further information and updates from the monitor and the Office of Mortgage Settlement Oversight is available at www.mortgageoversight.com.

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