The Mortgage Foreclosure Settlement: What Does it Mean?
After much buzz over the past several weeks, 49 state attorneys general and the federal government announced that they have reached agreement with the country’s five largest mortgage loan servicers (Ally/GMAC, Bank of America, Citi, JPMorgan Chase, and Wells Fargo) to resolve claims involving mishandling of both the foreclosure process and review of homeowner requests for mortgage loan modifications under available foreclosure relief programs.
As of this writing, the actual settlement agreement has not yet been made available. Key components of the agreement that have been reported include:
Monetary Commitments: $25 billion (some sources report it may be $26 billion), broken down roughly as follows:
Agreement to Servicing Standards: the five signatory banks have agreed to a set of servicing standards that appear designed to rectify some of the obstacles borrowers have encountered trying to take advantage of existing relief programs such as the Home Affordable Modification Program (“HAMP”). These standards include a single point of contact for borrowers seeking mortgage loan modifications, a commitment to maintaining adequate staffing levels and conducting appropriate training for personnel handling such requests, requirements for timely and clear communications with borrowers, and standards for executing documents in connection with foreclosure proceedings in order to avoid “robo-signing” of key documents.
Agreement to oversight by the State Attorneys General: banks will be required to report compliance, and could be subject to significant penalties from the state if they fall out of compliance.
No release of private claims: it is reported that the settlement does not involve releasing these banks from liability for private civil claims, individual or class action.
For people who have already lost their homes to foreclosure, this settlement is likely to be cold comfort, as a one-time payment of $1500-$2000 does not come close to making one whole for that experience. Assuming the reports to be correct, however, acceptance of that payment will not bar an individual from bringing separate civil claims if the bank’s handling of the foreclosure and/or the workout process was in violation of any other state or federal law. In other words, though it is probably not nearly enough money for most affected homeowners, they may be able to be partially compensated through this settlement without giving up their right to seek full compensation from their lender.
Borrowers currently struggling through the loan modification process with any of these five banks could see some significant relief, through the funds made available for principal reduction. One of the challenges for lenders under HAMP has been finding a way to reconfigure loans to arrive at an affordable payment, with limits on the amount of principal that can be forgiven- there is only so low an interest rate can go, and so many years a loan can be extended for. A commitment by the banks to allocate substantial funds toward making these principal reductions could well break the logjam for many loans under review.
Borrowers who are current but “underwater” (meaning the amount they owe on the mortgage exceeds the current market value of their home) could also see some concrete benefit from the settlement, as the banks have agreed to put $3 billion toward refinancing those loans. This appears similar to the recently announced HARP program for loans held by Fannie Mae and Freddie Mac: the loan would not be restructured, but borrowers would have the ability to take advantage of currently low interest rates.
It is unknown how (if at all) this settlement will affect loans that are held not by an individual lender but as part of securitization “pools” that are serviced by the signatory banks. These pools are overseen by trustees with obligations to bondholders, who sometimes claim that they cannot modify more than a certain number of loans without risking default of those obligations.
As to the servicing standards, we read those with some combination of hope and disbelief. Clearly, a single point of contact with an appropriately trained individual with access to decision makers would be a vast improvement over what most of our clients have experienced over the past few years. Whether those standards will lead to any difference in outcomes, however, depends on the effectiveness of the proposed enforcement mechanisms and the extent to which the bank has truly made a commitment to modify eligible loans. It is worth noting that many of these standards (for example, timely and clear communications with borrowers) overlap with the standards and requirements that have been part of the servicer agreements under HAMP for the past three years, with little discernible impact on anyone’s behavior.
Another unanswered question relates to an aggrieved individual’s ability to enforce compliance with the agreement (if, for example, the servicing standards are not met). In the context of HAMP, many courts have held that borrowers could not sue to enforce the servicers’ obligations under HAMP, because those obligations arise under a contract between the servicer and the federal government, not between the servicer and the borrower. This has not prevented borrowers from seeking and obtaining relief under other applicable legal theories (and there have also been decisions to the contrary), but in our view has contributed to a generally unaccountable mindset among many servicers. We have seen no reports on whether the settlement will address this question: if individuals will have a right to enforce its terms, that could very well increase the chances that it will result in meaningful relief to homeowners. Even in the absence of such a provision, it could be that the servicing standards, much like the HAMP guidelines, will serve as an invaluable reference point in evaluating a bank’s conduct under other legal claims, such as claims for unfair and deceptive trade practices, negligence, or other causes of action.
Finally, it is unclear how the settlement defines eligibility for the various types of relief, and whether its standards are more or less expansive than those under HAMP. By way of example, HAMP requires that a borrower be either in default or “in imminent danger of default” in order to qualify for a loan modification. Variations in the definition of “imminent danger of default” among servicers have led to a significant conundrum for borrowers: falling behind on your payments may make it more likely your bank will qualify you for a loan modification, but it also has potentially devastating implications for your credit and leaves you vulnerable to foreclosure if you are not ultimately approved for a modification. We will be very interested to see if the settlement agreement mirrors this language or includes a less subjective definition of eligibility.
Immediate Implications for Homeowners
For borrowers whose loans are held by one the five signatory banks, you will eventually be contacted if the bank determines you are eligible for relief under the settlement. Bear in mind, however, that the settlement is going to be executed over the next three years, and according to the published timeline, the process for identifying eligible borrowers in the first instance is expected to unfold over the next 6 to 9 months. Thus, you may be facing key deadlines in the foreclosure process before your bank can even identify you as eligible under the settlement. You can contact your bank directly (see below for the designated contact information for each signatory bank), but you may also want to consult with an attorney immediately if you are facing any such deadline.
For borrowers whose loans are held by other, non-signatory banks, this will not directly affect you, but it may have an impact in the long run on how other lenders approach the modification process. Some proponents of the settlement have expressed the hope that the agreement with respect to principal reduction will be the beginning of a trend as other lenders and/or policy makers consider how to address the foreclosure crisis; lenders may also be concerned about attracting the attention of the Attorney General themselves, and may become more careful to follow servicing procedures and improve their communication with borrowers.
If you need advice relating to a pending foreclosure, efforts to modify your mortgage loan, or your rights and options under this settlement, please feel free to contact us:
Emily Smith-Lee Beth Nussbaum
(781)784-2322 (781) 784-2322