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The $25 Billion Housing Settlement: Regulations with a Side of Cash

One of the biggest bank payouts won't solve the foreclosure crisis overnight, but it will impose new regulations and help begin reforming the mortgage industry.

A week ago, someone asked me if I thought the $25 billion housing settlement reached by California Attorney General Kamala Harris, several other states and five banks would anything to help the housing market.

The simple answer is yes, although the biggest benefit may be in the details of the settlement, not in the billion dollar headlines.

The good news is that almost half of settlement has been mandated for loan modifications, meaning that the five banks must modify roughly $10.2 billion dollars worth of mortgages. 

In theory, loan modifications are a no-brainer. Keeping an otherwise “good” homeowner in a house avoids a messy, costly foreclosure, not to mention another empty home on the market and lengthy resale process. 

Yet despite overwhelming public pressure for more "mods" and a $30 billion 2009 federal incentive program known as HAMP, principal reduction loan modifications have become the stuff urban legend. 

A local loan office formerly known as Blue Oak Mortgage opened an in-house loan modification branch in early 2009 yet closed the project a few months later after many attempted modifications proved fruitless.

“We thought it was unethical for us to be charging for a service that the borrower could essentially do on their own," said Megan Sovel, a loan consultant with Blue Oak. 

While 3 million homes have been lost to foreclosure since the crash, an estimated 4 million more households are 90 days late on their mortgage. If that’s not enough, more than 10 million homeowners are underwater on their homes, owing an average of $40,000 more than their home is now worth.  

So let's do some math. 10 million homeowners and a $10.2 billion set aside for modifications yields a whopping $1,020 per household. Narrow the payout to just the first callers and you’re looking at 255,000 homeowners who now owe exactly what their home is worth. Not bad, but it doesn’t really “do anything” about the 9.6 million other households that are none the richer. 

Thankfully, there is something substantial in the details. Although how these provisions will be enforced is still vague and the final text of the act is yet to be released, two outcomes of the settlement are nothing short of monumental. 

These include nationwide reforms to servicing standards, including requiring a single point of contact in communication with borrowers. Also, for the first time ever, there is now a mandate that upon receipt of a complete loan modification application, a lender may not foreclose upon a homeowner until it has reviewed the application to nationally set guidelines.

In other words, requirements for reasonable customer service. 

And yet the term “monumental” is no hollow exaggeration and perhaps shows just how broken the distressed property world of banking is. Any borrower who has attempted a loan mod or short sale could tell you how amazing it would have been to have just one contact at just one branch. 

It’s fairly common to have two to three different points of contact, in different time zones, at times asking for the same document.  Inconvenient when things are going smooth, harrowing when a foreclosure sale is set for next week. 

As an agent, I could only hope that the act mandates the use of email as one can only wonder at the logic of faxing a 60-page document to a fortune 500 company. Apparently some of the most powerful institutions on the planet are still in the digital dark age.   

The second point is fairly self-explanatory. If defaulting on a payment is imminent and you’re looking to buy time, apply for a loan modification and you can’t be foreclosed upon until you’re either formally denied, or you’re blessed with a modification approval and your payments are reduced to a manageable level. In either case, you’ll get more time to figure out the best long-term course of action, and you’ll avoid foreclosure.

To be certain, the two provisions won’t be executed without flaw and it’s not even clear when they’ll actually take effect. And for an industry with a track record of less than stellar customer service, hiring and training the necessary staff to carry out the new laws certainly won’t be an overnight venture. 

What’s more, the settlement and its regulation only apply to “privately owned” mortgages, that is, loans not held by Fannie Mae or Freddie Mac, so only about 50 percent of homeowners will benefit.

So yes, the regulations will clearly help the market. The $25 billion? Forget it. Even $50 billion would hardly scratch the surface of our housing mess of negative equity that I believe to be over the half trillion dollar mark - a number with eleven zeros. 

In a perfect world, homeowners underwater will have real, understandable options available to avoid foreclosure. They’ll have a chance at keeping their home, and if not, a clear and reasonable path back to home-ownership and financial security. 

Thanks to legislation over the last three years, the majority of homeowners in short sale are federally protected from being on the hook for forgiven debt - also known as deficiency judgments. What’s more, recent lending guidelines allow otherwise high credit scoring borrowers the ability to qualify for a mortgage in a little as two years following a short sale, three for an FHA loan. 

I can only imagine that if half of those foreclosed upon since 2006 could qualify for a loan that the infusion of 1.5 million buyers would certainly “do something” to help the current housing market.

The settlement is not perfect, but it will help. Not in a broad, overnight fix of cash payments to those in default (unless you increased its size by an order of 20), but in combination with legislation already in place, a slow, gradual, lasting attitude adjustment of what it means to be in default. 

For those behind on home payments and in despair, three years isn’t long. In that amount of time you could quite possibly be on your feet and qualified to buy again, but this time at a price that actually supports a sustainable financial lifestyle.  

Armand Ramirez is a realtor with Century 21 Bundesen in Petaluma. To learn more about Armand, visit ArmandRamirez.com

Mike Kelly February 23, 2012 at 02:24 AM
Well said Armand. Short-Sales have JUST not exploded as was the promise of HAFA (Housing Affordability Foreclosure Alternative). We are still at 160-180 days average to close and the numbers are JUST not exceeding on average a 100 per month. They come in right around 25% of sales each month, sometimes higher in the winter as "Distressed" assets or houses KNOW NO season!

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