State attorneys general and the nation's five largest mortgage servicers could be within weeks of reaching a $25 billion agreement to settle allegations that foreclosures were improperly processed.
Sources close to the matter say the Obama administration has ratcheted up pressure for the parties to end their year-long negotiations and bring some closure to the robo-signing issues that surfaced last fall.
The accord with the states involves five mortgage servicers: Ally's GMAC Mortgage, Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Those familiar with the talks say a deal will likely be struck within the next four to six weeks; if not, the negotiations will splinter off into separate settlements between individual states and individual servicers.
As the settlement terms stand now, servicer penalties are based on the number of foreclosures they've completed.
With Bank of AmericaÃ¢â‚¬â„¢s acquisition of CountrywideÃ¢â‚¬â„¢s legacy portfolio and JPMorganÃ¢â‚¬â„¢s inheritance of Washington MutualÃ¢â‚¬â„¢s troubled mortgage business, these two servicers are expected to carry the largest proportion of the settlement.
Of the collective $25 billion settlement amount, $5 billion would come in the form of cash payment penalties. The remaining $20 billion would take shape in principal-reducing modifications and refinancing for underwater borrowers.
According to details highlighted by FBR Capital Markets, servicers would receive 100 percent credit for slashing a principal balance from up to 150 percent loan-to-value (LTV) ratio to 115 percent LTV, and 40 percent credit for writing the principal down to 150 percent LTV when the original amount exceeds that threshold.
Servicers will have three years to reduce enough principal to satisfy the monetary value specified for that part of the
settlement. At three years, if this mandate is not met, it will convert to a cash penalty.
In exchange for these penalties Ã¢â‚¬" which as the settlement stands now is more than the $20 billion initially put forth by attorneys general Ã¢â‚¬" states will release servicers from future liability related to mortgage servicing and originations. The multi-state settlement does not, however, include any liability release related to securitizations.
With the current agreement, state officials are hoping to bring California back into the fold. New York, though, likely will not be part of the multi-state settlement.
California Attorney General Kamala Harris withdrew from the negotiations in September, calling the settlement proposed at that time Ã¢â‚¬Å“inadequateÃ¢â‚¬Â for homeowners in her state.
Ã¢â‚¬Å“It became clear to me that California was being asked for a broader release of claims than we can accept and to excuse conduct that has not been adequately investigated,Ã¢â‚¬Â Harris said when she excused herself from the negotiating team.
New York Attorney General Eric Schneiderman was removed from the settlement talks in August by his peers, who said he was attempting to undermine their negotiations.
Schneiderman has opposed any agreement that would prevent further investigations into the major servicersÃ¢â‚¬â„¢ previous foreclosure practices, and heÃ¢â‚¬â„¢s advocated for a larger settlement that would address both homeowners and investors affected by the alleged violations.
The ability for the states to settle absent New York hinges on California Attorney General Harris. As the state with the highest incidence of defaults, California is a critical piece to any multi-state settlement. Without it, servicers may question the scope of the monetary sanctions currently on the table.
Some market analysts have raised concerns that even with California, the servicers may have trouble accepting the size of the penalties to be assessed when compared to the limitations of the liability release.
The banks want assurances that the settlement will protect them from future litigation, and theyÃ¢â‚¬â„¢ve been vying for securitization practices to be included in that protection.
Representatives from the lead negotiating team for the attorneys general, however, have stated that they will not consider releasing servicers from liabilities related to securitized loans.