Foreclosure Settlement Muddies Outlook for Mortgage Relief

WASHINGTON - NOVEMBER 13:  (L-R) CEO of the Ce...Image by Getty Images via @daylife
The foreclosure-abuse settlements announced yesterday by federal regulators may make it harder for state attorneys general and the Obama administration to force banks to reduce loan balances for more troubled U.S. homeowners. The 14 largest U.S. mortgage servicers, including JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC), agreed to review all foreclosed loans from 2009 and 2010, and pay back losses in cases that were mishandled. They also will improve procedures by hiring staff, upgrading document-tracking systems and assigning a single point of contact for each borrower.

While the attorneys general proposed many similar terms last month, banking regulators didn’t include any requirements for lowering mortgage debt. That may hinder Iowa Attorney General Thomas J. Miller as he leads a group of state officials working with the administration to require lenders to evaluate loan cuts for some borrowers whose homes are worth less than their mortgages.

The settlements, which include yet-to-be determined monetary penalties, also prohibit banks from seizing homes for which borrowers have negotiated a trial or permanent loan modification. The attorneys general proposal goes a step further, freezing the foreclosure process even while borrowers are being evaluated for workouts.

Divided Views
The agreements stem from reviews of the mortgage-servicing industry by the Office of the Comptroller of the Currency, the Federal Reserve, the Office of Thrift Supervision and the Federal Deposit Insurance Corp. The banks didn’t admit or deny regulators’ findings.
The loan-reduction rules are the most divisive part of Miller’s bid to get servicers to settle with all 50 states on allegations of abusive foreclosure practices. In the past month, at least seven state attorneys general rejected the proposal, and Brian T. Moynihan, chief executive officer of Bank of America Corp. (BAC), said widespread principal cuts were bad policy.

Miller has pushed for such relief as one of the best ways to bolster the housing market by reducing foreclosures, which drive down property values for homeowners who continue to pay their mortgages.

Rewarding Default

“The Obama administration and the state attorneys general are committed to ensuring the banks are held accountable in a way that helps to strengthen the housing market and helps American families stay in their homes,” he said yesterday in a statement. Opponents of mandatory loan writedowns, including the Office of the Comptroller of the Currency and dissenting attorneys general, say they reward borrowers for failing to meet their obligations and could cause additional defaults as homeowners stop making payments so they can qualify for help.

“There’s very little incentive for the banks to accept any deal that’s going to require them to forgive significant amounts of principal for underwater borrowers,” said Jaret Seiberg, a financial-policy analyst for Washington Research Group, a Washington-based unit of broker MF Global Holdings Ltd. “It’s one of those slippery slopes where once you start, you don’t know where you’ll end.”

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