A mortgage-servicing settlement proposal sent to banks represents a “mixed bag” for investors in home-loan securities, making a “mockery” of some bondholder concerns, Amherst Securities Group LP analysts said.
State attorneys general and federal agencies submitted the 27-page proposal to the country’s five largest servicers last week as a starting point for negotiations, according to Iowa Attorney General Tom Miller, who is helping lead the talks.
Investors would benefit from proposed terms that would limit bad-loan fees borne by borrowers or bondholders and that would boost the number of loan modifications that lower homeowners’ balances, reducing “re-defaults,” the New York-based analysts led by Laurie Goodman said today in a report. The “big negative” stems from terms that would slow the pace of property sales after borrowers stop paying, the analysts said.
The proposal also fails to require banks to take relatively larger writedowns on borrowers’ junior-ranking home-equity debt as they cut principal on mortgages owned by investors, “making a mockery of the notion of lien priority,” they wrote. “We had also hoped that there would be some notion in this document that the second lien was subordinate to the first” and would take a complete, or at least disproportionate, writedown of principal, according to the report.
The current settlement doesn’t go further than saying that second liens must be modified “at least proportionately to the first lien,” the authors wrote. Goodman, who was inducted into the Fixed Income Analysts Society’s Hall of Fame in 2009, has said lenders have jeopardized the housing market’s recovery by not recognizing impairments to their home-equity holdings.
Defaulted Loan Delays
Proposed terms that would lengthen bad-loan timelines include prohibiting servicers from starting foreclosures while considering borrowers for loan modifications and requiring that they be “more careful” and thorough in producing documents to support foreclosures, Goodman said in an e-mail.
Investors lose more money per defaulted loan as property liquidations take longer, with a two-year delay for a $225,000 mortgage creating losses potentially 9 percentage points larger as taxes, insurance and property maintenance accrue, according to Amherst.
Liquidation timelines have slowed since October when all 50 states began investigating foreclosure practices after complaints that banks used faulty documents in seizing homes and servicers reviewed their practices. A Bank of America Corp. executive said yesterday that his company, the largest home-loan servicer, expects to “return to normalized foreclosure run rates over the next two to three months.”
Regulators may also seek penalties from banks to help fund mortgage-principal reductions, which lenders have typically opposed on concern that they would encourage more defaults.
Lowering balances is “not a panacea,” Terry Laughlin, the Bank of America executive who runs a unit handling its most-troubled loans, said yesterday during presentations for its investors.
Out of a sample of 100 borrowers that could potentially get loan modifications from the company under the federal Home Affordable Modification Program, 28 never return calls or fail to provide financial information, he said. An additional 52 fail to qualify, about 46 percent because they already have housing payments equal to or below 31 percent of their incomes, the “affordable” bills that HAMP seeks to create, he said.
“The fundamental issue here is if a borrower does not have sufficient income or their income’s been diminished, principal reduction is not going to help them,” Laughlin said.
Any settlement between servicers and regulators is unlikely to be completed within two months, contrary to what reports this week suggest, Amherst said.
“Investors need to make their voice heard,” the analysts said. “Our analysis indicates there is still time.”