25 Billion Dollar Settlement-Revisited

Posted by kevin on September 11, 2012 under Foreclosure Blog | Comments are off for this article

A while back, I reviewed the terms of the 25 billion dollar settlement with you. My conclusions were that the settlement was a big victory for servicers who were getting off the hook for a myriad of bad deeds, but that I would have to wait and see about benefits to borrowers in New Jersey.

A report recently came out from the overseer of the settlement who claims that there has been some movement across the country on reductions of principal amounts due on first mortgages. This positive news has been echoed, to a degree, by confirming posts on the listserve of the National Association of Consumer Bankruptcy Attorneys. But most of those posts came from attorneys out West.

I had not heard any news of principal reductions on first mortgages in NJ. But that does not mean that it is not happening. So, I reached out to attorneys on both sides, mediators and HUD counsellors to get an idea of what types of settlements are available. To my disappointment but not surprise, I did not hear much about modifications involving reductions in principal on first mortgages. What the lenders and their servicers are offering are deep discounts on or forgiveness of second mortgages, usually on properties that are underwater.

Big deal! Prior to the settlement, you could negotiate, without too much difficulty, a 10% settlement of underwater seconds (sometimes even lower). The second lender, you see, is not in the driver’s seat. Under New Jersey law, the second lender may sue on the Note. But lenders do not waste their money on a useless judgment if the borrower is out of work or underemployed. Moreover, aggressive pursuit of a money judgment on a second may just force the borrower into bankruptcy. If the second lender does not sue on the note, it has three choices. Buy out the first mortgage- very expensive and makes no sense if the property is underwater. Get wiped out in the foreclosure. Or try to make a deal with the borrower. So, this is one of the few situations in recent residential mortgage foreclosure where the borrower has some leverage.

Well, if it is true that lenders are forgiving seconds, that is pretty good for the borrower who is getting the deal. She is not out the few thousand dollars that would have been paid to take out the second. But is it good for the aggregate of borrowers in NJ who are looking to reduce principal and modify into an affordable loan? I question that. The lenders, cynical as ever, are forgiving 50-100K equity lines where they would have received nothing in a foreclosure. What do the lender get, then? They get credit against, in the case of NJ, the $67 million obligation under the 25 billion dollar settlement. So foregoing $5000 saves them from giving a $50,000 or $100,000 reduction in principal on a first.

Clearly, the lenders are following the letter but not the spirit of the 25 billion dollar settlement.