Posted by kevin on September 11, 2012 under Foreclosure Blog | 
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.
Posted by kevin on May 13, 2012 under Foreclosure Blog |
A couple of months ago, we informed you that the various Attorneys General entered into a settlement with the 5 largest servicers over robo-signing and other servicing irregularities. In the next few posts, I want to explain to you the terms of the settlement. However, before we can get into the details, we need to understand the basics. Why was the deal made with servicers and not lenders?
What is a servicer and how does it differ from your lender? It is not always clear. In fact, most borrowers think that their servicer is actually their lender. If you go on the Freddie Mac website, a borrower is advised to contact its lender for details and then in parentheses it says (servicer). So, Freddie Mac is acknowledging the confusion.
A lender is the entity that gives the borrower the money or buys the loan from the original lender. A servicer is an entity that collects your mortgage payments on behalf of the lender and distributes those payments pursuant to the terms of the loan agreements. In the old days (before 1970), the entity that lent you the money actually collected your payments and did the bookkeeping associated with your mortgage loan. So, the lender and the servicer were one and the same.
For purposes of this paper, let’s refer to the lender as a bank. Historically, the bank made a mortgage loan and made its money, primarily, on interest payments. They serviced their own loans; that is, they collected the money, paid the taxes and insurance, performed the paperwork, and dealt with any defaults on the loan by foreclosure or otherwise.
With the advent of Fannie Mae, Freddie Mac, and later private securitizations, however, a marketplace was set up where banks could sell their mortgage loans to investors. By selling their loans, the bank would get most, if not all of its money back, and thereby have money to make more loans. So, instead of making its money primarily from interest payments, banks started to become involved in high volume lending and made the bulk of their money on first mortgages on the fees that it charged to the borrowers. Those fees included application fees, points, credit report fees and the like.
When banks started selling their loans, they quickly noticed that investors who wanted to buy the income stream of the mortgage notes did not necessarily want to collect the payments each month and perform the paperwork. But banks, especially large banks, had the infrastucture already in place to do the servicing. So, what happened? The banks that sold the loans to investors, in some cases, made a deal with the investor to service the loans that it sold- for a fee.
Now to finish off the scenario, many large banks did not sell all their loans. For the most part, large banks retained or held their second mortgages. In this circumstance, the bank acted in the like it did in the old days- it was both lender and servicer.
How did the servicers get involved in the 25 Billion dollar settlement? Well, although foreclosures are supposed to be brought in the name of the lender, the reality is that the servicer is the entity that deals with the defaulted loan. The servicer is the one that calls or writes to the borrower to find out why payments have stopped and whether the loan could be put back on track by modification, forbearance, short sale or the like. In addition, it is the servicer that has all the information necessary to prosecute the foreclosure. So, the servicer usually hires the lawyers, appraisers, real estate people, litigation support companies and the like on the behalf of the lender. And it was the servicer that was involved in all the shenanigans relating to robo-signing, lost notes, improper charges, fraudulent endorsements and more which were being investigated by the various AG’s and led to the 25 billion dollar settlement.
