Foreclosure Settlement Falls Short

As published in the Los Angeles Business Journal, March 5, 2012:
 

The recent landmark foreclosure settlement between the nation’s five largest lenders and 49 states has certainly captured the headlines. After over a year of intense brinksmanship between the involved parties to mitigate bank liability while setting a realistic level of restitution to compensate victims of the robo-signing debacle, an agreement emerged.  The resulting accord may have minimal impact on the final wave of projected foreclosures still on the horizon, and won’t provide a meaningful boost to help real estate. At best, it’s a punitive solution for past abuses that will not be adequate to actually help the industry recover.

To be fair, any part of the settlement that provides relief for struggling borrowers can provide a stimulus to the market.  An estimated $18 billion of the $25 billion total settlement amount will go to California, with $3.92 billion of that earmarked for Los Angeles County.  Over 59,000 foreclosure filings occurred in Los Angeles County in 2011.  While awards up to $2,000 for borrowers wrongfully foreclosed on won’t bring back their homes, it at least provides some compensation to begin a fresh start. 

Recent estimates suggest that approximately a million borrowers in California alone who are currently underwater could be eligible for up to $20,000 in principal reductions thus making payments much more affordable.  An ancillary benefit to lower payments or any principal reduction on the senior deed could occur in situations where a 2^nd trust deed exists on properties and borrowers would be encouraged to stay current on payments giving life to lenders on the verge of being wiped out by foreclosure.  At first glance, this could appear as welcome news.

Deeper analysis reveals that the agreement falls short of addressing the 180,000+ REO inventory in Fannie and Freddie’s possession or the borrowers separated from these homes through the foreclosure process. Nor does it address the thousands of underwater mortgages held by the GSEs to which the GSEs are resistant to enact refinancing solutions.   Moreover, mortgage lenders now face a new wave refinancing applications generated by homeowners seeking to qualify under the new agreement. 

Borrower Backlog

One lender has already been quoted as citing processing times as long as 90 days for refinancing applications. Borrowers not qualified for refinancing under the new proposal could create such a backlog that eligible borrowers would be forced to wait. Or worse still, the market could see the return of higher interest rates to slow and manage the flow of mortgage applications.

Private capital has long been courted as the white knight to lead the recovery.  While prevailing sentiment would hardly characterize the private investor segment as a “victim,” the principal reductions proposed in the current agreement which would significantly affect investor returns, could result in the mass exodus of private capital from the market. Remember, too, that private capital is comprised not only of private equity firms and high-net-worth individuals, but also of insurance, pension and other institutional investors seeking maximum return for their beneficiaries.  Private investors provide a necessary back stop that if removed, may require more taxpayer and / or government intervention to fill the void.

While this $25 billion mortgage settlement plan gives genuine hope to many Angelenos to receive compensation or even lower monthly payments, it truly serves to provide regulators, lenders and government with a concrete example they can point to confirming that they took definitive action to restore economic equilibrium. There are some substantial cracks in the pavement, however, that will limit the true intent of the settlement in providing real help to the real estate market.