There’s new evidence that a $9.3 billion settlement to help homeowners is less beneficial than it might seem.
First, a little history. In 2011 the federal bank regulator, the Office of the Comptroller of the Currency, signed consent decrees with some of the U.S.’s major banks, ordering them to review their foreclosures and compensate borrowers where they found mistakes. That was separate from the $25 billion National Mortgage Settlement coordinated by 49 state attorneys general. The federal settlement was supposed to be the first time borrowers would have an independent review of their foreclosures.
Then, late last year, news leaked that the OCC was working on a new multimillion-dollar settlement with the banks. By the time the deal was announced in early January, it became clear that the new settlement papered over the flaws in what was supposed to be an independent foreclosure-review process the OCC had set up in 2011. The OCC said that process was slow, expensive, and wasn’t producing much proof that borrowers were harmed, though the Wall Street Journal last week reported that the error rates at some large banks topped 20 percent.
After trumpeting the deal, the OCC late last week released copies of the new agreements with 13 banks. Buried in the details (Article IV of the PDF documents linked at the bottom of the press release, to be exact) are a few ways the settlement waters down the amount of help banks must extend to borrowers. When you hear about a $9.3 billion settlement, you might logically think that $9.3 billion in aid will be given to borrowers. But that’s not the case. Instead of giving banks credit only for the amount by which they cut a mortgage, it gives banks credit for the full value of the unpaid principal balance on the loan. As the New York Times explains:
“If a bank cut a borrower’s $100,000 mortgage debt by $10,000, the lender could then reduce its commitment under the settlement by $100,000. In a previous foreclosure settlement, the banks received credit only for the $10,000.”
Beyond the detail highlighted in the Times, the settlement is weakened in other ways: It doesn’t set maximums or minimums for the types of aid banks provide to borrowers. The National Mortgage Settlement, for example, required banks to reduce the principal on troubled mortgages by at least $10 billion—arguably one of the most beneficial modifications for a borrower. But in the new OCC settlement, banks aren’t required to reduce any principal. It also gives banks the same credit—based on that unpaid principal balance—for all different types of aid, whether they reduce balances on a first mortgage, forgive a second lien, modify the interest rate on a loan, or approve a short sale. Banks can also get credit (at 10¢ on the dollar) for making what’s known as deficiency waivers, where banks forgo the right to go after borrowers for the balance of a mortgage they weren’t able to recoup in a foreclosure.
The settlement also broadens the category of loans that banks can use for credit. The consent order was focused on borrowers who had pending or completed foreclosures on their primary residence in 2009 and 2010, but in the new agreement, banks can get credit for working with any borrower. That means a bank could get credit for pretty much any foreclosure prevention it does for any customer at risk.
All in all, the settlement moves further away from compensating borrowers and actually identifying mistakes banks may have made.