National Mortgage News on Mortgage Settlement: Paid by investors and incentive for banks
The settlement was structured to give banks more incentives to write down principal on loans they owned themselves, with fewer incentives for modifying loans held in securitized trusts. For example, servicers received a dollar of credit for every dollar of principal writedowns on mortgages they owned themselves but 45 cents’ credit for every dollar in reductions on investor loans.
But those incentives apparently were not strong enough for Bank of America (BAC) and JPMorgan Chase (JPM). In a report last week, Goodman (Laurie Goodman, the director of the Housing Finance Policy Center at the Urban Institute) wrote that the two banks took advantage of the opportunity to reduce their own losses. Investors paid for $3.7 billion of the relief credited under the settlement to Bank of America and $1.2 billion to JPMorgan Chase.
By contrast, Citigroup (NYSE:C), Wells Fargo (WFC) and Ally Financial’s former Residential Capital unit used a negligible amount of investor loans to earn their credits, providing virtually all of the principal reductions to loans held in their own portfolios.
“Bank of America and JP Morgan Chase were able to gain some settlement credit without taking the loss themselves,” Goodman wrote.
In all, B of A earned 39% of its credits on the backs of investors and JPMorgan Chase earned 29%, Goodman found.
B of A and JPMorgan did not respond immediately to requests to comment. Joseph Smith, the monitor for the settlement, was unavailable for comment, hisoffice said, but in a statement he confirmed that only 76% “of total credited relief under the National Mortgage Settlement was related to loans owned by servicers rather than serviced for other investors” — meaning investors ate the other 24%.
It can be argued that principal reductions and loan modifications are also in the best interest of investors because the loans become more affordable and resume performing, and the losses tend to be less than those taken when a borrower goes into foreclosure.