A Lifeline for Homeowners, Families and Communities in Bank Deal Being Negotiated by "Evil" Obama Administration

Investigate banks or help struggling homeowners? That might just be the unpalatable choice being set up by a proposed settlement that would have the major banks mired in the foreclosure debacle - Bank of America, Citigroup, JPMorgan Chase and Wells Fargo - pay about $20 billion in loan modifications for struggling homeowners and possibly counseling programs. The catch? From all news sources, the banks are asking for a release from liability - as broad as possible. While giving banks even partial immunity from criminal liability is nothing to be taken lightly (and nothing to be celebrated), the question of just what the homeowners get in a possible deal has been little discussed. Sure, we would all like it if the banks gave homeowners the help they needed and left themselves open to criminal probes. But just what is their incentive to do so?

The Left media has run with the theme of how teh evil Obama Administration is trying to "pressure" NY Attorney General Eric Schneiderman to accept the deal, and how heroic Schneiderman is for resisting them. To be sure, other state Attorneys General such as Beau Biden of Delaware, Kamala Harris of California (who is a strong backer of President Obama's, and whom I absolutely adore), and Martha Coakley of Massachusetts have all said they are interested in joining a probe on Wall Street's shady mortgage securitization practices. As their respective states' chief law enforcement officials, they should well be wanting to do exactly that. But I have seen the media narrative completely ignore what's in the actual proposed deal. That's important because ultimately this is a cost-benefit analysis, even if it sucks sometimes.

The draft deal, at least the mortgage modification portion of was leaked to and released by the AmericanBanker.com website and is available for everyone to read. Everyone, it seems, except for those who in the media world call themselves "journalists." First of all, let's remember that the negotiations are ongoing on this, and the legal immunity provisions are still fluid. but the banks will probably not accept a deal that offers them nothing on that side of the ledger. But here is the part of the deal that is the reason why the Administration (and Housing advocates) are predisposed towards a settlement.

The settlement would establish an affirmative duty for the bank (servicer) to offer loss mitigation option before foreclosing on the property. In addition, banks would be forbidden from pursuing dual-track (or as homeowners understand it, double-cross) process to both work on loss mitigation and foreclosure at the same time. And finally something that housing advocates have been seeking for a long time, since the beginning of the housing crisis:
Servicer shall offer and facilitate loan modifications rather than initiate foreclosure when such loan modification is a greater net present value (NPV) than foreclosure. The NPV formila used by Servicer shall be made available to CFPB upon request.
Haven't we been rightly pointing the finger at the banks for a long time for not working with borrowers to let them stay in their own homes while offering them loan modifications so that their payments would be more affordable? That is exactly what this deal would require. The net present value test is basically a test that determines the amount of money the bank is likely to get from the borrower should they offer the borrower a loan modification program vs. if they were to foreclose and sell the property instead. Basically, the terms of the settlement would legally bind the banks do a loan modification instead of a foreclosure, if expected total payment (inflation adjusted) would be greater than what they would usually get in a foreclosed home sale. Which is going to be the case for the great majority of times for underwater mortgages considering the usual low sale value of bank owned property as well as the aftermath of the housing bubble burst.

Not only does the deal establish an affirmative duty for the banks to offer a loan modification program, it also protects against abuses. Even if servicing agreements prohibit offering a loan modification - for some weird reason, there is notion out there that investors can expect to get paid more if a home is foreclosed on and a family set out on the street than by offering a loan modification - banks are still required to calculate whether the borrower would be eligible for a loan modification, and if the borrower is, the banks would be required to contact the parties to the service agreements and ask them to modify those agreements so that a loan modification can be offered.

But what if the banks try to screw homeowners anyway, and just tell them that the NPV formula requires them to sell by using a different appraisal value than what the market price for the home is? The borrower has recourse.
Borrowers shall have the opportunity to provide evidence that the NPV or eligibility calculation was in error. If a borrower disagrees with the property value used by Servicer in the NPV test, the borrower can request that a full appraisal be conducted with HAMP directive 10-15 and that such value be used in NPV calculation.
The deal, then, essentially closes the backdoor for the banks to use whatever value they want in order to have their desired outcome rather than what is fair under the terms to the borrower.

Couldn't the banks just bury the borrower under the cost of paperwork? Nope. Under the deal, not only would banks be required to pay for the reproduction and submission of all documents from the borrower to the bank, they would also be required to maintain portals for both borrowers and housing counselors free of charge to either. Plus, when banks do foreclose, they would be required to maintain the property without blight (yes, it's mentioned in so many words in the draft that was leaked). Which, by the way, increases the bank's costs and thus, in financial arithmetic, makes offering a loan modification that much more attractive, and under the deal, required.

For the homeowners who are under water and are having a hard time paying their mortgage, facing default or foreclosure, there is no doubt that this is a lifeline. Banks being required to offer loan modifications wherever feasible instead of foreclosing can often be the difference between being on the streets and staying in their homes. It can make the difference between children being taken to foster homes vs. being able to stay with their families. And in addition, it would better protect neighborhoods, neighboring housing values and local tax revenues from being decimated by foreclosures.

So if you are trying to understand what the conflict is here, this is it. It's not really about whether the banks are let go free - especially since what form of immunity they would be granted is still under discussion and many attorneys general correctly want to protect their prerogatives. It is rather about the trade-off. There it is. It is about the trade-off of what we - and the 50 state attorneys general - are willing to pay as a price for helping struggling families and households who are desperately trying to hold onto their shelter, whose lives have been turned up side down with no fault of their own. It is essentially a conflict between those who care more about solving this:

vs. those who want more to see this be put on bank executives:

Trust me, it is something that should make people think. As a proponent of accountability, it made me think. But I must say that as a proponent of justice and focusing on helping the worst off first, given the choice, I am going to pick the neighborhoods, the families and the homeowners getting some relief now as opposed to the possibility of perp-walks later. Also, not all avenues of the perp-walk would be closed. Depending on the level of immunity in a final deal, the ability to prosecute banks and financial institutions on Wall Street on all other crimes will remain available, as will the option on fraud. No reports have thus far indicated that anyone other than the banks would be immunized in any fashion at all. So shady traders, financial firms and Hedge Fund investors remain wide-open to liability. As many of you know, Goldman CEO Lloyd Blankfein has lawyered up as federal investigators close in.

Whatever you feel about it - and we will be watching how it pans out ultimately, resist the temptation to go bonkers on the Administration for advocating for a deal, or suddenly hero-worshiping the attorneys general who are opposing one. Their investigations are obviously a catalyst for the banks' incentive to make a deal, and we should thank them for it, however, we should also realize that a deal will have to include some form, some extent of immunity in order to help homeowners. It might suck not to be able to perp walk many bank executives on mortgage securities crimes, but what is the price we are willing to pay to give families and communities a lifeline?

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