The Deal Is Done, but Hold the Applause

FIVE big banks finally reached a deal with government authorities last week over dubious mortgage practices and foreclosure abuses.

After months of talks, Ally Financial, Bank of America, Citibank, JPMorgan Chase and Wells Fargo agreed to pay a total of $5 billion in cash to try to remedy this fiasco. They will also help homeowners who are underwater on their mortgages by reducing the principal on their loans by a combined $17 billion over the next three years.

Borrowers who qualify will get $3 billion in refinancing arrangements. Those who were improperly foreclosed on will get a combined $1.5 billion. That probably nets out to less than $2,000 a person.

The banks crowed that this settlement would help the economy and the reputation of the mortgage industry. Michael J. Heid, president of Wells Fargo Home Mortgage, characterized the deal as “a very important step toward restoring confidence in mortgage servicing and stability in the housing market.”

But it’s hard to imagine that this one settlement will be enough to restore trust in loan servicers. Given what we know about their questionable practices — how they larded improper fees on struggling homeowners, for example, and forced people to buy home insurance at three times market rates — restoring confidence in these firms will take some doing.

There’s no doubt that the banks are happy with this deal. You would be, too, if your bill for lying to courts and end-running the law came to less than $2,000 per loan file.

As for the supposed benefits to the economy, skeptics abound. One of them is Paul Diggle, property economist at Capital Economics in London. In a report last week, he rejected the notion — espoused by both banks and government authorities — that this deal would help turn around the American housing market.

For most homeowners, it will barely move the needle. Forgiving $17 billion in principal “is a drop in the ocean,” Mr. Diggle said, “given that close to 11 million borrowers are underwater on their loans to the tune of $700 billion in total.” Doing the math, $17 billion in write-downs would be about 2.4 percent of the total negative equity weighing down borrowers across the nation now.

Yves Smith, the perspicacious founder of the Naked Capitalism Web site, was especially critical. In a post, “The Top 12 Reasons Why You Should Hate the Mortgage Settlement,” she wrote that this deal was a stealth bailout of the major banks.

Why? It will improve the value of the second liens or home equity lines of credit they own. These vast holdings — roughly $400 billion — are worthless if the first mortgages preceding them are underwater. But if the banks don’t write down the second liens alongside the first mortgages, the seconds become more valuable. A lower principal balance on the first mortgage makes the second more likely to pay.

But perhaps the largest question looming over this settlement is how it will be policed. Recent history is littered with agreements that required banks to take specific steps to make amends. All too often, the banks have skated away from their promises.

A prime example is a settlement over predatory lending that was reached by Countrywide Financial in 2008. Led by attorneys general in California and Illinois, that deal had Countrywide vowing to provide $8.4 billion in loan relief to borrowers in the form of lower interest rates and loan modifications.

It sounded good on paper. But Bank of America, Countrywide’s parent, defied many aspects of the settlement, according to Catherine Cortez Masto, Nevada’s attorney general. She sued Bank of America last summer, contending that it had raised interest rates on loan modifications even though Countrywide had promised to lower them.

Bank of America also declined to provide loan modifications to qualified homeowners as required in the deal and improperly proceeded with foreclosures while borrowers’ modification requests were pending, Ms. Masto’s suit said. Furthermore, the bank failed to meet the settlement’s 60-day requirement on granting new loan terms, allowing months — and in some cases, more than a year — to go by with no resolution, the lawsuit said.

Bank of America has disputed the allegations.

Other borrower programs also seemed promising until bank resistance stymied them. Consider the Foreclosure Mediation Program in Nevada, set up in 2009 to help resolve the mountain of delinquent and troubled loans in that state.

Under the program, banks must mediate with borrowers who request such help. But two years of statistics, through last September, show 5,771 cases where mediators found that banks had failed to participate in good faith or were not complying with other aspects of the mediation law. That is equivalent to 42 percent of all the mediations completed in the program.

Perhaps more troubling, the percentage of mediations where lenders have failed to comply has risen in the most recent six months of data.

“It’s astounding that in such a huge percentage of cases the lenders are not complying,” said Philip A. Olsen, a former Nevada Supreme Court settlement conference judge. “The banks have learned that they can thumb their noses at the program and it won’t cost them anything.”

So you have to wonder whether banks will thumb their noses at last week’s settlement, too. That makes policing compliance crucial.

That task falls to Joseph A. Smith Jr., the banking commissioner for North Carolina since 2002. Not only must he oversee the monetary relief programs in the settlement, he must also enforce extensive changes to loan-servicing practices that the deal entails.

I had hoped to ask Mr. Smith how he planned to monitor the expansive and arcane terms of the settlement and what size of army he would be deploying to ensure that the banks fulfilled their promises. But he was not available on Friday to answer my questions.

An administration official, speaking on condition of anonymity because he was not authorized to discuss the deal, said that Mr. Smith would hire accountants and consulting firms to audit the banks’ performance and that as monitor, he would be able to interview bank employees. If the monitor finds that a bank has failed to meet its commitment, he can impose penalties of up to $5 million, depending on the errors’ seriousness or frequency.

Additional details will emerge. But this kind of minutiae will determine whether the settlement succeeds. So many borrower programs have failed since the foreclosure crisis began. Another nonstarter will only add to the mistrust that many people harbor toward those large institutions, both public and private, that contributed so mightily to this mess.

After reports that the timeline to iron out final details of the robo-signing settlement is “ambitious,” representatives from several major servicers, attorneys general, and some federal regulators are said to have a meeting planned for Wednesday, marking their first face-to-face discussion of terms.

According to the Wall Street Journal, officials from Bank of America, JP Morgan Chase, Wells Fargo, Citigroup, and GMAC will meet in Washington on Wednesday.

Perhaps in person meetings will help to diffuse some of the flames that the controversial proposal has ignited over the past few weeks since it became public.

Though recently released reports reveal that banks do practice principal write-downs in certain circumstances, many servicer officials spoke out against the mandatory principal write-downs that the settlement proposed.

The third quarter Mortgage Metrics Report by the Offices of the Comptroller of the Currency and of Thrift

Supervision revealed that servicers had performed principal reductions on 4.5 percent of total modifications completed through the third quarter. Principal reductions accounted for 10.2 percent of all HAMP modifications through the quarter.

But lawmakers have questioned the soundness of across the board write-downs, stressing that borrowers will have no incentive to pay their mortgages if they know banks will be forced to give them write-downs should they default.

Several attorneys general have also voiced their concerns about the proposal, with most of the concerns focusing on the principal write-downs.

And earlier this month four senators sent a letter to Iowa Attorney General Tom Miller asking, “Will forcing servicers to fund principal reductions for underwater loans they service affect the incentive of mortgagors to stay current on their loans?”

Even attempts to find other solutions to principal write-downs have been met with scorn from industry participants. After reports that FDIC chairman Sheila Bair suggested servicers provide borrowers with a cash-for-keys incentive to vacate their homes, Congressman Spencer Bachus released a statement deriding the idea.

“This proposal is simply outrageous and the worst bailout idea dreamed up so far,” he said. “Before the ‘cash for keys’ program was reported, the government was focused on spending money to help borrowers stay in their homes. Now they’re proposing to spend money to reward borrowers who strategically default.”

New data released by Lender Processing Services (LPS) Monday show that while delinquencies continue to decline, an enormous backlog of foreclosures still exists with overhang at every level.

As of the end of February, foreclosure inventory levels stood at more than 30 times monthly foreclosure sales volume, indicating this backlog will continue for quite some time, according to LPS.

Ultimately, these foreclosures will most likely reenter the market as REO properties, LPS notes, putting even more downward pressure on U.S. home values.

The company reports that the average U.S. loan in foreclosure right now has been delinquent for a record 537

days. A full 30 percent of loans in foreclosure have not made a payment in over two years.

Still, LPS says its data show that banks’ modification efforts have begun to pay off, as 22 percent of loans that were 90-plus-days delinquent 12 months ago are now current.

February’s data also showed a 23 percent increase in Option-ARM [adjustable-rate mortgage] foreclosures over the last six months, far more than any other product type.

In terms of absolute numbers, Option-ARM foreclosures stand at 18.8 percent, a higher level than subprime foreclosures ever reached, LPS said.

In addition, deterioration continues in the non-agency prime segment.

According to LPS’ report, both jumbo and conforming non-agency prime loans showed increases in foreclosures and were the only product areas with increases in delinquencies.

LPS reports that the total U.S. loan delinquency rate stood at 8.8 percent as of the end of February. The U.S. foreclosure inventory rate hit 4.15 percent.

By the company’s calculations, there are a total of 6,856,000 mortgages in the United States that are considered non-current.