The first details on how mortgage servicers must fulfill their end of the $25 billion federal-state settlement can be found within the 233 pages of Wells Fargo's 2011 annual report filed with the Securities and Exchange Commission (SEC) this week.
As expected, first-lien principal reductions carry the most weight in terms of credit towards each servicer's financial obligation under the agreement. Forgiveness of past due payments for unemployed homeowners garner dollar-for-dollar credit, as do costs associated with demolishing vacant, foreclosed properties.
So far, officials have released only a summary of the terms agreed to by U.S. government agencies, 49 state attorneys general, and the nation's five largest mortgage servicers. The settlement itself has not yet been filed with the courts and that has roused questions from both the skeptics and the supporters.
""To date, Congress and the public have been given only the broad outlines of the terms of the settlement,"" Sen. Richard Shelby (R-Alabama), ranking member of the Senate Banking Committee said at a hearing this week. ""As a result, there are many unanswered questions about how the settlement was reached and how it will operate.""
Wells Fargo is the first to offer some clarity in a regulatory filing with the SEC The company explains that each servicer's monetary obligation under the settlement Ã¢â‚¬" for Wells, it's $5.3 billion Ã¢â‚¬" is broken down in three components: Consumer Relief Program, Refinance Program, and Foreclosure Assistance Payment.
The Foreclosure Assistance Payment Ã¢â‚¬" which is $1 billion for Wells Ã¢â‚¬" is a direct outlay to the federal government and participating states for them to use as they see fit to tackle
the problems brought on by foreclosures. To fulfill what's owed under the Consumer Relief Program Ã¢â‚¬" a $3.4 billion commitment from Wells Ã¢â‚¬" and the Refinance Program Ã¢â‚¬" totaling $900 million for Wells' part Ã¢â‚¬" servicers receive credit for their loss mitigation efforts, the amount of which is determined by the nature of the modification or other form of relief provided to the borrower.
For example, first-lien principal forgiveness on mortgages with a loan-to-value (LTV) ratio of 175 percent or less equates to a credit of 100 percent for every dollar forgiven. This type of mortgage relief must make up at least 30 percent of all Consumer Relief Program credits.
First-lien principal forgiveness for LTV greater than 175 percent, on the other hand, constitutes just 50 percent credit for the amount forgiven over 175 percent LTV.
Second-lien principal forgiveness is a whole different ballgame, with credit dependent on how delinquent the borrower is. Ninety percent credit is given for loans that are 90 days or less delinquent, 50 percent for 91-179 days delinquent, and just 10 percent for loans that are 180 days or more past due.
Credit for short sale deficiency waivers on first- and second-lien mortgages range from 20 percent to 100 percent, depending on whether the servicer, investor, or both incur the loss.
Forgiveness of payment arrearages for unemployed borrowers receives 100 percent credit.
For servicers' anti-blight actions, principal forgiveness associated with properties where foreclosure is not pursued gets 50 percent credit, while cash costs paid by the servicer for demolition and REO donations to nonprofit organizations receive 100 percent credit.
Under the Refinance Program, credit is calculated as the difference between the pre-existing interest rate and the new interest rate multiplied by the unpaid principal balance times a multiplier ranging from 5 to 8, depending on the loan term.
Wells Fargo says it began receiving credits toward satisfying its financial obligation on March 1. Additional credit will also be factored in for certain actions taken within 12 months of the start date.
Wells Fargo's tutorial on the mathematics of the settlement starts on page 74 of its 2011 annual report (page 50 of the electronic PDF document).