Settlements Actually Mean Anything? FinCen’s Impact on Non-bank Mortgage Lenders


drunk stupid is no way to go through life son.” One probably doesn’t
hear that admonishment much in the halls of the Financial Crimes Enforcement
Network (FinCEN), which finalized regulations that require non-bank residential mortgage lenders and originators to
establish anti-money laundering (AML) programs and file suspicious activity
reports (SARs)
, as FinCEN requires of other types of financial

Law firm Ballard Spahr was quick to set up a
free webinar for its attorneys to explain the new requirements and discuss the
steps non-bank residential mortgage lenders and originators must take now to
comply with the new requirements. Mortgage banks, who now have this new
regulatory worry on their plate, may want to have someone sit in next Thursday
(2/16) from 12-1 EST. For more information, contact Lora Burns at (Mortgage
bankers have certainly become a growth industry for law firms everywhere.)

With this
in mind, all kinds of things are being “settled” out there. (I am
sure that many mortgage bankers wish their repurchases were being settled, which,
on the flip side, is consuming the lives of many investor reps…) First, a “settlement” agreement was announced
regarding Germany’s bailout of Greece
. Announcing it is one thing but carrying
it out is another, as anyone who tries to lose 10 pounds will tell you. It is
unclear whether the Greek people will accept austerity, whether it will be
enforced, or whether Germany and other EU members will recognize it as enough. The markets had pretty much priced this in,
so that the markets almost didn’t care when Greek leaders agreed to the
austerity measures tied to the next installment of its aid package.

Second, the
Federal Reserve Bank of New York sold $6.2 billion worth of residential MBS to
Goldman Sachs, its second major sale this year of assets acquired in the 2008
government bailout of insurer AIG. The auction-based sale will enable the New
York Fed to recoup the remaining outstanding loan balance of $19.5 billion to
the portfolio called Maiden Lane II. Those keeping track remember that Credit
Suisse bought a $7.01 billion chunk of the portfolio three weeks ago after an

Third, the
U.S. Attorney for the Eastern District of New
York announced the settlement of claims her office had brought against Bank of
America, Countrywide Financial Corporations
and some of its affiliates for
underwriting and origination mortgage fraud on loans to unqualified borrowers
and insured by the FHA. Of the $1 billion, there is an immediate payment of
$500 million to correct some of the harm done to FHA by Countrywide’s
conduct.  The remaining $500 million will be deferred to fund a loan
modification program for borrowers across the nation with Countrywide mortgages
that are under water.

And now
the press can stop speculating on the servicing
: a final settlement between the nation’s five largest mortgage
servicers, two federal agencies and 49 of the states’ attorneys general (AGs)
was announced Thursday. (Ok, Oklahoma, what’s the deal?) The market measured
this as a slight positive for banks as
the uncertainty of the settlement is cleared up and banks can now focus on
moving forward on foreclosures
. Bank of America, JPMorgan Chase Co.,
Wells Fargo Company, Citibank, and Ally Financial, (formerly GMAC) and
their servicing subsidiaries have agreed to commit a minimum of $17 billion
directly to borrowers through a series of relief effort options including
principal reduction. 

For more
granularity, the ponying-up consists of Ally/GMAC ($310 mil), BofA ($11.8
billion), Citi ($2.2 billion), JP Morgan ($5.3 billion), and Wells Fargo ($5.4
billion) for $25 billion. Servicers will likely provide up to an estimated $32
billion in direct homeowner relief.  There will be $4.2 billion paid
directly to the states and $750 million to the federal government.  In
addition, a comprehensive set of new standards will be implemented to protect
homeowners from future abuses and an independent monitor will be appointed to
ensure servicer compliance. HUD Secretary Shaun Donovan has also commented that
the total cost may increase to $45bn if additional banks sign onto the
settlement deal.

Of course this does little to stop
future lawsuits

against these piñatas of the financial world. Nothing in the agreement grants any immunity from criminal
offenses and will not affect criminal prosecutions.  The agreement does
not prevent homeowners or investors from pursuing individual, institutional or
class action civil cases against the five servicers.  The pact also enables
state attorneys general and federal agencies to investigate and pursue other
aspects of the mortgage crisis, including securities cases. The settlement only
covers servicer liability for robo-signing and improper mortgage servicing.
Notably, it does not cover any wrongdoings associated with mortgage
securitizations, MERS, or any criminal liability.

of the complexity of the mortgage market and this agreement, which will span a
three year period, borrowers in some cases may be contacted directly by one of
the five included mortgage servicers regarding loan modification offers, may be
contacted by a settlement administrator or their state attorney general, or may
need to contact their mortgage servicer to obtain more information about
specific programs and whether their loan qualifies.  More information will
be made available as the settlement programs are implemented.”

Capital broke down the numbers. $17 billion will come in the form of principal
reductions on first and second lien mortgages ($10 billion), forbearance
modifications, and costs to facilitate short sales. Principal reductions will
not be applied to any loans in agency MBS trusts, and for principal reductions
on non-agency loans or in bank portfolios, the servicer must determine that the
modification results in a higher NPV than foreclosing on the home. $3 billion of
the settlement cost will come in the form of refinancings for borrowers who are
current on their mortgage payments but underwater. $1.5 billion, per Barclays, will
be used to provide immediate cash payments of up to $2,000 to borrowers who
lost their homes to foreclosure between January 1, 2008 and December 31, 2011.

modifications, refinancings, and borrower payments outlined in the settlement
will be performed over three years, with 75% of each bank’s target required to
be reached within two years. Servicers will identify borrowers eligible for
these benefits over the next six to nine months. Banks that fall short of their
settlement targets by the deadlines will be assessed cash penalties. 
Joseph Smith, the former North Carolina Commissioner of Banks, has been
selected as a third party monitor to provide oversight of the participating
bank servicers.

As part of
the settlement, the participating banks will be required to comply with new
servicing standards, most of which likely have already been implemented or are
in the process of being incorporated into standard servicing procedures. (They
are too numerous to repeat here.)

If you
were a bank, wouldn’t you try to modify as many non-portfolio loans as possible
through this program since while they only get a 50% credit, banks also escape
the actual monetary costs of forgiveness? However, this may not be possible for
multiple reasons, and things become pretty complicated. For one thing, Barclays
notes, the bank servicers will have to follow some NPV rules to make a judgment
on whether to apply a principal forgiveness modification. All of the five
servicers are part of the HAMP program and have presumably already been
applying NPV tests to delinquent loans and have already determined on which
loans a debt forgiveness modification would make sense. This settlement cannot
change that assessment. Of course, more loans could be modified through debt
forgiveness due to the increased HAMP PRA incentives that were announced a few
weeks ago but this settlement does not change the NPV calculation beyond that.

So what can we gather from all this? As I told one reader, the whole thing
was pretty much greeted with a shrug rather than champagne corks popping,
especially since it certainly doesn’t end many types of lawsuits. For the impact
on non-agency RMBS modifications it is small, but will keep foreclosure rolls
slow for another 6-12 months. The details released specifically exclude Fannie
Mae/Freddie Mac pools from this settlement but one can expect that loans in
private-label pools will be affected. It seems that the banks will be required
to target the $17 billion in forgiveness and other relief, and will receive a
125% credit for every dollar of forgiveness that they apply to portfolio loans –
but only a 50% credit for every dollar of forgiveness applied on loans that
they service but do not own. The program will have a significant impact on
liquidation timelines as it is likely to slow down 90+ delinquencies to
foreclosure and foreclosure to REO roll rates as servicers take some time to
adjust to the new servicing standards. After that, however, we expect these
rates to pick up and rise to levels higher than that experienced over the past
12-24 months.

The U.S
economy continues to show some signs of life. Yesterday Jobless Claims
decreased 15,000 in the week ended Feb. 4 to 358,000, with the important 4-week
moving average down to 366,250. Wholesale Sales were up 1.3% in
December from the revised November level and were up 11.8% from the
December 2010 level.  Yesterday’s $16 billion 30-yr bond auction went
pretty well, but the 10-yr worsened .250 closing at 2.05%. In mortgage-land,
ThomsonReuters noted that, “mortgage banker supply in the $2.0 billion area
weighed as well as the Fed’s buying has been about $1.25 billion per day on
average.” Rate-sheet MBS prices declined/worsened about .250.

morning we’ve had some December International Trade figures which showed the
deficit climbing from $47.1 to $48.8 billion. Later we have the University of
Michigan Consumer Sentiment number. At 12:30PM EST Chairman Bernanke speaks on
“Housing Markets in Transition” at the 2012 National Association of
Homebuilders International Builders’ Show from Orlando, Florida. In the early going the 10-yr is down to
1.97% and MBS prices are .125-.250 better.

With Valentine’s Day approaching, you will be able to impress the object of
your affection with some caring phrases. Here is “I LOVE YOU” in 10
languages, guaranteed to upset some readers.
English “I Love You”
Spanish “Te Amo”
French “Je T’aime”
German “Ich Liebe Dich”
Japanese “Ai Shite Imasu”
Italian “Ti Amo”
Chinese “Wo Ai Ni”
Swedish “Jag Alskar  Dig”
Lithuanian “As Tave Meliu”
Alabama, Arkansas, Oklahoma, Texas, Louisiana, South Carolina, Georgia,
Tennessee, Florida, Mississippi , Kentucky, North Carolina, West Virginia,
Virginia, Manitoba, Saskatchewan, Alberta “Nice Rack, Get in the Truck”.

If you’re
interested, visit my twice-a-month blog at the STRATMOR Group web site located
at The current blog discusses
residential lending and mortgage programs around the world, part 2. If you have
both the time and inclination, make a comment on what I have written, or
on other comments so that folks can learn what’s going on out there from the
other readers.

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