The top U.S. housing official has come to the defense of the National Mortgage Settlement, calling it “the most robust principal reduction program in our nation’s history,” and deflecting criticism tied to the reliance on short sales and 2nd-lien assistance by the big banks responsible for correcting wrongful foreclosure actions.
Short sales, combined with the settlement’s requirements that borrowers be properly evaluated for modifications, is “a positive, not a negative sign,” wrote Shaun Donovan, U.S. Secretary for Housing and Urban Development, in a piece published by the Huffington Post.
Nationwide, 42 percent of the debt forgiven through Dec. 31 has been via “short sales completed/deficiency forgiven”, or about $19.505 billion out of the total relief of $45.82 billion. In a short sale, the home is sold for less that the homeowner owes in mortgages. In this type of relief under the settlement, that “deficiency” is forgiven.
Consumer groups have criticized the dominance of short sales as credited relief in the historic deal between federal and state authorities and the biggest lenders: Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial (formerly GMAC). The settlement announced early last year stemmed from the infamous “robo-signing” of hundreds of thousands of foreclosures and improper evictions.
Adocates say the settlement’s mission should be keeping foreclosure victims in their homes.
“It is important to note that principal reduction modifications, not short sales, are the bulk of the relief provided by the settlement,” Donovan said. “Short sales represent less than 43 percent of the total assistance provided and have decreased as a share of relief in every Monitor’s report since August 2012.”
The settlement requires that at least 60 percent of the servicer’s credits must come from principal reduction, and at least half of that must be for first lien principal reduction, the HUD chief said.
“Short sales are helpful for borrowers who need to leave their underwater home or those who cannot make sustainable payments, even on a modified loan,” Donovan said. “When we negotiated this settlement, too many borrowers in those circumstances were forced into foreclosures and were left with a deficiency balance when a short sale would have been better for them, their neighborhood, and the loan’s investor.”
There have also been recent press accounts of how the banks are eligible to receive credit for “activities that are not, in fact, creditworthy,” Donovan said.
Donovan is referring to the practice of lenders forgiving a second mortgage and claiming credit for “modifying” the mortgage under the settlement’s terms. A shrewd move since second mortgages are worthless anyway in the event of foreclosure. In some cases, lenders exclusively modify secondary loans while all but ignoring the troubled, larger primary mortgages, reports have said.
“These examples include banks forgiving a homeowner’s second lien while foreclosing on the first they also hold,” Donovan said. “In fact, as the settlement makes clear, and Joe Smith, the independent Settlement Monitor confirms, he will not give any credit for a modification that does not provide a tangible benefit to a homeowner.”
However, as the New York Times reported, just under 71,000 borrowers, or 13 percent of the total borrowers under the settlement, have received assistance on their primary mortgage, which has been the main source of defaults and foreclosures.
But more than 170,000 homeowners received assistance on their second mortgage, which typically is a home equity line of credit.
Nonethess, Donovan said, the latest report on relief through Dec. 31 recently released by Smith “demonstrates significant progress on the broadest and most robust principal reduction program in our nation’s history.
“Because of the settlement, banks have provided more than $22.5 billion in completed and trial principal reduction that helps borrowers stay in their homes, lowering the monthly payments on more than 266,000 loans and reducing struggling homeowners’ loan balances by more than $84,000 on average,” Donovan.
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