Robo-Signing Settlement Could Give Short Sales Boost

Mortgage Loan Servicers
to Shell Out $5 billion in Fines

March 21, 2012

The $25 billion government agreement to settle with five of the nation's largest mortgage service institutions over "robo-signing" procedures could give short sales a boost, as these loan servicers will be given a credit when they authorize sales including forgiveness of a part of upside down debt of homeowners. Although the agreement is only projected to help a small portion of borrowers who owe more money on their their properties than they are are worth -- maybe one out of 20, in accordance by one guesstimate -- it will also assist in bringing some degree of certainty back to the housing market by taking away a few of the obstacles keeping properties stuck within the foreclosure tube.

Announced during last month, specific terms of the settlement among mortgage servicers along with a coalition of federal agencies and state attorneys general were filed this week. Broadly, the settlement is calling for mortgage loan servicers to shell out $5 billion worth of fines plus commit to paying $17 billion minimum in relief to homeowners, including principal loan reductions. An additional $3 billion has been earmarked to assist upside down borrowers in refinancing. This will increase the volume of short sales, as lenders and loan service providers will receive identical credit for handling a short sale to completion, as they receive for modifying a loan or handling a principal loan reduction

On Sunday, a Wall Street Journal article said that the structuring of write-downs on mortgages was a major contention point of the year-long discussions leading up to the settlement agreement. Allowing forgiveness of debt on authorized short sales to be counted towards the obligatory $17 billion of principal reductions helped in securing a settlement that is going to reach more homeowners, the paper said. Loan servicer providers will also receive partial credit when the borrowers are investors, rather than just the banks, taking a loss, the Journal article said.

A Brookings Institution researcher told the Journal the settlement agreement could possibly help around 5 percent of upside down homeowners, or around 500,000 borrowers. We can expect a short-term stepping up of foreclosure activity, as the servicer providers and lenders are gaining some a sense of assurance over what they can or cannot do. Part of the increase will be among those loans which do not meet the conditions of the settlement agreement.

For loan servicer providers to receive credit over a principal amount reduction, a mortgage loan must be a minimum of 30 days delinquent, possess a pre-modified loan-to-value ratio of a 100 percent minimum, and satisfy specific debt-to-income ratio, in accordance with a settlement analysis by the K&L Gates law firm. At minimum 85 per cent of propertied that are occupied should have had an a principal outstanding loan balance below or at the greatest Fannie Mae and Freddie Mac conforming loan limit caps as of Jan 1, 2010.

Because service providers won't receive 100 percent credit on every type of relief provided, the actual relief amount provided could reach as high as 32 billion, the state attorneys general remarked as they announced the settlement. "As far as the the overall real estate market, this is going to have hardly any effect on the market," Sharga said. "Consumer advocates don't believe the settlement went deep enough, and people who look at the housing markets now realize that the total amount of money and the number of homes involved won't have much of an effect on the markets. although federal housing officials did address those along with other concerns.

"This settlement agreement doesn't -- and isn't intended to -- resolve or solve all the concerns and exploitations related to the national housing fiasco," officials with HUD blogged today. "This settlement agreement is extremely narrow as to the things it releases banks of. This settlement agreement purpose is to deal with the servicing facet of the housing crisis, which was not a cause the crisis."

The settlement does not prevent government from disciplining wrongful securitization conduct which is going to be a focus of a new Residential Mortgage-Backed Securities Working Group, HUD said. Federal and state authorities can also engage in criminal enforcement proceedings related to the conduct of service providers, including fair lending,, fair housing, civil rights, and other violations. Additionally, if the remainder of the six to 14 loan service providers sign to the settlement agreement, it would expand to around $30 billion providing over $45 billion of benefits to existing borrowers, HUD said.

Cade Holleman, the executive director of Women REO Brokerage based in Irvine California, said the time is approaching fast when brokers and their agents who have been concentrating heavily on REO properties will have a need to diversify. Loan modifications, short sales, and refinancing, are all "pulling REO inventory from the pipeline," he said. "You must keep an eye on what's going on," Holleman said. "No longer can you be an 80 percent REO agent," but must broaden your horizons into short sales along with property management. 

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