The Obama administration is always talking about helping “responsible homeowners,” but only a small fraction of the big mortgage settlement announced last week will go to conscientious borrowers who have continued making payments despite being underwater or owing more than their homes are worth.
And none will go to that other group of responsible homeowners, who bought homes they could afford and have been building equity by paying down their principal.
The bulk of the settlement between the federal and state governments and the nation’s five biggest mortgage servicers will go to people who are underwater and have stopped making their payments – or are on the verge of doing so. For these folks, the settlement is akin to winning the lottery. One fear is that some people will stop making payments so they can qualify for a windfall.
Not all borrowers in this situation will be helped, though. The settlement only covers loans owned and in some cases serviced by Bank of America, Wells Fargo, JPMorgan Chase, Citibank and Ally Financial.
‘Lucky few’ helped
“This will help a lucky few,” says Chris Thornberg, president of Beacon Economics. Although proponents say the settlement will help all homeowners by stabilizing the housing market, Thornberg says that despite its record size, it’s still not big enough to affect housing prices.
Here’s a look at the main provisions:
– Principal reduction: People who are underwater and are behind or “almost behind” on their mortgage payments could have their mortgage balances reduced. When they sell their homes, every dollar of principal reduction is a free dollar of profit from the banks, their shareholders or investors holding their mortgages, which include pension and mutual funds.
About $8.9 billion – or almost half of the $18 billion in borrower benefits California expects to receive – will reduce principal for an estimated 250,000 borrowers. That’s about $35,000 per homeowner.
Principal reductions
To get a principal reduction, homeowners will have to prove they have an economic hardship that makes it impossible for them to continue paying the loan. “This is not providing benefits to people who have the ability to pay but are choosing not to,” says Paul Leonard, director of the California office of the Center for Responsible Lending.
Loans owned by the big five banks are eligible for principal reduction. Loans that are serviced by the big five but owned by investors may be eligible, if the investors allow or agree to principal reduction.
Bank of America has entered a separate agreement with investors that will let it reduce principal on most of the loans it services that are held in private mortgage-backed securities, says Helen Kanovsky, general counsel with the U.S. Department of Housing and Urban Development.
Loans owned or backed by Fannie Mae, Freddie Mac, the Federal Housing Administration or Veterans Administration are not eligible.
Kanovsky says that if a homeowner has a first and second mortgage and both are owned by participating banks, the banks have agreed to reduce principal on the first and second loans proportionately, even if one bank owns the first and another owns the second.
Who gets aid undisclosed
Although the banks have committed to making a certain dollar amount of principal reductions, it’s impossible to say who will get them and how much they will get because it depends on a large number of complex, undisclosed factors.
Analysts for the credit rating agency Fitch say that “modification schemes designed to help borrowers avoid foreclosure, including principal reductions, could improve (loan) performance. However, indiscriminately applying a wide-ranging program could raise moral hazard risk. This scenario may result in higher defaults among borrowers who would otherwise remain current despite their negative equity position.”
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