Although the settlement is only expected to help a fraction of homeowners who owe more their properties are worth -- perhaps one in 20, according to one estimate -- it will also help bring certainty back to housing markets by removing some of the obstacles that have been keeping homes stuck in the foreclosure pipeline.
Announced last month, detailed terms of the agreement between mortgage servicers and a coalition of state attorneys general and federal agencies were filed today.
Broadly, the settlement calls for mortgage servicers to pay $5 billion in fines and commit to a minimum of $17 billion in homeowner relief, including principal reductions. Another $3 billion is earmarked for helping underwater borrowers refinance.
"We will see an increase in short sales, because lenders and loan servicers will get the same credit for doing a short sale, as if they did a loan modification or principal reduction," said Rick Sharga, executive vice president of Carrington Mortgage Holdings LLC.
The Wall Street Journal reported Sunday that the structure of mortgage write-downs was a major point of contention in the year-long negotiations leading to the settlement.
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Allowing debt forgiveness on approved short sales to count against the required $17 billion in principal reductions helped secure a settlement that will reach more borrowers, the paper said. Loan servicers will also get partial credit even when it's investors, rather than the banks themselves, taking the loss, the Journal said.
A researcher at the Brookings Institution told the Journal that the settlement could help about 5 percent of underwater borrowers, or about 500,000 homeowners.
"We will probably see a short-term increase in forcelosure activity, because the servicers and lenders at last have a sense of certainty about what they can and cant do," Sharga told Inman News. Part of that increase will also be among loans that don't meet the criteria of the agreement.
For loan servicers to get credit for a principal reduction, a loan must be at least 30 days delinquent, have a pre-modification loan-to-value (LTV) ratio of at least 100 percent, satisfy specified debt-to-income ratios (DTIs), according to an analysis of the settlement by the lawfirm K&L Gates. At least 85 of occupied properties must have had an outstanding principal balance at or below the highest Fannie Mae and Fanni Freddie conforming loan limit cap as of January 1, 2010.
Because servicers won't get 100 percent credit for all types of relief that are provided, the actual amount of relief provided could total as much as 32 billion, state attorneys general said in announcing the settlement.
"In terms of the overall housing market , our position is this will have very little effect on anything," Sharga said. "Consumer advocates don't think it went far enough, and people who look at housing markets realize that the number of properties and the amount of money involved won't have a measurable effect on markets."
Federal housing officials addressed those and other concerns today.
"This agreement does not -- and is not intended to -- solve or resolve all the issues and abuses related to the housing crisis," officials with the Department of Housing and Urban Development blogged today. "This agreement is very narrow as to what it releases banks from. This settlement is intended to address the servicing aspect of the crisis, which did not cause the housing crisis."
The settlement doesn't prevent the government from punishing wrongful securitization conduct that will be the focus of the new Residential Mortgage-Backed Securities Working Group, HUD noted. State and federal authorities can also pursue criminal enforcement actions related to conduct by servicers, including civil rights, fair housing, fair lending and other violations.
Also, if the remaining six to 14 loan servicers sign on to the settlement, it would grow to about $30 billion with more than $45 billion in benefit to homeowners, HUD said.
Cade Holleman, executive director of the Irvine, Calif.-based National Association of Women REO Brokerages, said the day is fast approaching when brokers and agents who have concentrated heavily in real-estate owned properties will have to diversify.
Short sales, refinancings, and loan modifications are each "pulling REO inventory out of the game," he said.
"You've got to keep your eye on that process," Holleman said."You can no longer be 80 percent REO," but must diversify into short sales and property management.
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