Banks' loan changes will vary under mortgage settlement
— -- Not all distressed home loan borrowers will benefit equally from the $25 billion national mortgage settlement filed in federal court last week.
Part of the settlement requires the five leading mortgage servicers to forgive at least $10 billion in principal that homeowners owe on mortgages. That will help underwater borrowers who owe more on their mortgages than their homes are worth. But the level of principal reduction they get may well depend on who owns their loan.
Some Bank of America borrowers will see their principal cut to the point where they will not be underwater.
But the settlement terms only require JPMorgan Chase, Wells Fargo and Citibank to write down mortgages to the point where borrowers' loans are 20% more than home values, although the banks can write them down deeper.
Ally Financial, meanwhile, has settlement terms that require it to write down some first-lien home loans to no more than 5% above the home's value.
In some cases, Ally borrowers may see loans written down to an 85% loan-to-value ratio — meaning borrowers would have 15% equity in their homes.
The differences stem from BofA striking a separate agreement with federal officials that allows it to avoid $850 million in penalties by making deeper cuts in loan principal.
Ally, formerly GMAC, had already modified 28% of its home loans and so it needed more write-down options to satisfy its portion of the settlement, spokeswoman Gina Proia says.
All told, the servicers must provide $20 billion in mortgage relief to borrowers and $5 billion to state and federal governments.
Given the complexities of the mortgage market, "it's next to impossible to give the same deal to every homeowner," says banking analyst Paul Miller of FBR Capital Markets.
To satisfy their settlement obligations, the servicers will modify loans and receive "credit" against what they owe under the settlement.
For some modifications, they'll get $1 in credit for each $1 in principal forgiveness. But in many cases, they'll get only partial credit. As a result, the $10 billion is expected to result in more than $10 billion in relief.
Under the settlement, servicers are likely to modify loans they own themselves, rather than ones they service for investor owners, Miller says.
Distressed homeowners whose loans are owned by Freddie Mac or Fannie Mae won't benefit from the settlement at all. That's half of all home loans.
Payment histories will matter for people seeking principal reductions. BofA requires borrowers to have been 60 or more days late on payments as of Jan. 31. Ally says it will consider those who are current but at risk of default.
The banks say they have begun reviewing customers for principal write-downs.
Borrowers who lost homes to foreclosure will be eligible for payouts from a $1.5 billion fund. That could mean 750,000 borrowers getting about $2,000 each, federal officials have said.
A claims administrator will oversee that part of the settlement.
"It'll be months" before payments are made, says Geoff Greenwood, spokesman for the Iowa attorney general.
The size of payouts will depend on how many people apply, says , an assistant Iowa attorney general who worked onPatrick Madigan the settlement.
That may not be as many people as possible.
Under a separate foreclosure-related settlement with 14 mortgage servicers, federal regulators sent letters last year to 4 million borrowers inviting them to seek reviews of their foreclosure cases and potential compensation.
Only 116,000 people have so far, according to the Office of the Comptroller of the Currency. The application deadline has been extended to July 31.
More information on that review is at independentforeclosurereview.com.
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