Hearing Raises Foreclosure Settlement Concerns

As more details of the foreclosure settlement emerge, additional concerns and questions continue to be raised. During a hearing before a Senate committee Wednesday, Debby Goldberg, special project director at the ""National Fair Housing Alliance"":http://www.nationalfairhousing.org/, addressed a handful of those concerns. One issue dealt with how the 13 servicers part of the settlement would receive credit for the $5.7 billion in mortgage assistance they agreed to provide.

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In her written testimony, Goldberg says that unlike the national mortgage settlement (NMS), the foreclosure settlement that replaced the Independent Foreclosure Review ""bases the amount of credit the servicer receives on the unpaid balance of the loan, rather than the amount of assistance provided to the borrower.""

This, she argued, would give servicers an incentive to focus on ""higher-priced homes with larger unpaid loan balances."" Goldberg explained a loan with an unpaid principal balance of $500,000 would yield that amount of credit for a servicer even if a loan modification provides relief for a smaller amount, whether it's for $1,000 or $10,000.

In an emailed statement, an OCC spokesperson said, ""While the IFR Payment Agreement provides credit to servicers based on the unpaid balance of the mortgage for activities that are eligible for credit under the National Mortgage Settlement, the ""amendments"":http://www.occ.gov/news-issuances/news-releases/2011/nr-occ-2011-47b.pdf to the consent orders published in February also described regulators expectations for effective, meaningful foreclosure prevention assistance.""

Goldberg also says that in contrast to the NMS, the IFR settlement gives loan modifications--which keeps people in their homes--and short sales ""equal footing"" by providing dollar for dollar credit for both foreclosure alternatives. In addition, Goldberg noted it's possible for servicers to meet their required goal of providing $5.7 billion in mortgage assistance by offering only short sales and deeds-in-lieu since there are no limits on what types of relief must be provided.

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Although the foreclosure settlement beats the slow pace of the abandoned IFR in terms of providing payments more quickly, Goldberg noted issues with the payment process itself.

To notify the 4.2 million eligible borrowers of the payments, Rust Consulting, the paying agent, ""sent postcards"":http://dsnews.comarticles/regulators-provide-payment-details-for-93b-foreclosure-settlement-2013-03-13.

""We are already hearing reports that borrowers are confused about the postcards, believe they may come from scam artists, or are simply throwing them out as junk mail,"" Goldberg said.

This, she added, raises concerns that borrowers may not actually open the mail with the checks.

""It is critical for regulators to track returned mailed and cashed checks to determine whether funds are not getting through,"" she said.

As for issues with uncashed checks, David Holland, EVP of Rust Consluting, explained regulators will leave accounts open for up to two years, which should provide the company with ""ample time.""

On April 12, 1.4 million checks were ""sent"":http://dsnews.comarticles/fed-problems-with-cashing-foreclosure-settlement-funds-corrected-2013-04-17, and about 50,000 checks totaling nearly $50 million have been deposited so far, regulators announced.

Goldberg also questioned the method used to determine how much borrowers would receive. Under the IFR settlement, about 4.2 million borrowers are eligible for payments ranging between $300 to $125,000. In total, 13 servicers are to provide $3.6 billion in cash, bringing the settlement's value to $9.3 billion.

To determine compensation for borrowers, servicers were tasked with slotting borrowers into specific categories.

""[I]t's not clear why responsibility for slotting borrowers into specific categories was given to servicers and why their record systems, which are seriously flawed, were used as basis for the slotting process,"" she said.

After examining a chart released by regulators on payment details, Goldberg also revealed 2,041 will receive $125,000 since they were forclosed on eventhough they were protected under the Servicermembers Civil Relief Act (SCRA); another 98 will receive that amount because they were foreclosed on but never in default.

About 2.3 million borrowers will receive $300 a piece. Borrowers who receive the lowest amount fell into one of three categories: their servicer brought a foreclosure against them even after being approved for a modification; their servicers never reached out to them for assistance; or they're in the ""other"" category, according to Goldberg. Those borrowers also never requested a free foreclosure review under the IFR. The 260,623 borrowers who did request a review and fell into one of the same categories should receive $500 or $600.