National Mortgage Settlement & Colorado Homeowners

What the National Mortgage Settlement Means for Colorado Homeowners

The National Mortgage Settlement is an agreement between five of the largest residential mortgage loan servicers and a coalition of state attorneys general and federal agencies that resolves violations in the way the banks handled loan modifications and foreclosures. The Settlement is designed to compensate borrowers who have lost their home to foreclosure, provide financial assistance to current underwater homeowners, and revamp lender servicing practices. While the highlights of the Settlement generally sound promising, Colorado homeowners are likely to benefit less than borrowers in other states.

The Settlement came about primarily as a result of the “robo-signing” of foreclosure affidavits, where lenders made wholesale sworn statements about the status of loans without reviewing the particulars of the accounts. Borrowers also complained about deceptive practices during the loan modification application process, particularly where banks led homeowners to believe that their loans would be modified, only to deny the applications and quickly foreclose on the properties. The Settlement calls for Bank of America, Citi, JPMorgan Chase, Wells Fargo, and Ally/GMAC to pay a total of $25 billion in penalties and homeowner assistance, as well as adopt new procedures designed to increase transparency. This article examines key characteristics of the Settlement and what they mean for past and present Colorado homeowners.

Where Does the Money Go?

The majority of National Mortgage Settlement funds (approximately $13 billion) are earmarked for providing relief to homeowners who want to stay in their homes and have the ability to make reduced mortgage payments. Of those funds, at least $10 billion will be dedicated to reducing principal balances on underwater properties, while another $3 billion will go towards refinancing loans for homeowners who are current on their payments but owe more than the property is worth. For borrowers who cannot afford to stay in their homes, even with other available assistance, an additional $7 billion is tabbed for facilitating short sales, offering forbearance and deferments programs, and assisting with post-sale relocations.

For those borrowers who have already lost their home to foreclosure, the Settlement establishes a fund of $1.5 billion. Proceeds from the fund will provide borrowers compensation if other foreclosure avoidance programs were not properly offered by the lender prior to foreclosing. Depending on the level of response, these uniform payments are expected to average about $2,000 per borrower. We expect that many Colorado homeowners who lost their residence to foreclosure may be entitled to this type of compensation. Additionally, the individual states participating in the Settlement (all except Oklahoma) will each receive shares of a $2.5 billion fund established for housing and foreclosure relief programs, including housing counseling, legal assistance, foreclosure prevention hotlines, foreclosure mediation, and community blight remediation.

What Other Changes Can Be Expected?

Aside from the financial contributions, another major component of the National Mortgage Settlement is that lenders must broadly reform their loan servicing practices. These changes are aimed at preventing improper foreclosures by requiring individual review of each loan referred for foreclosure. Every file must include evidence demonstrating that the lender is authorized to foreclose on the property. Prior to filing for foreclosure, lenders must send borrowers a default notice that summarizes potential foreclosure alternatives, outlines the grounds that allow the lender to foreclose, summarizes the account status, and provides the borrower an opportunity to request a copy of the promissory note and evidence of who holds it.

Before filing for foreclosure, lenders also must exhaust other possible foreclosure alternatives. If a borrower applies for a loan modification, the lender must hold off on filing for foreclosure. If a borrower receives an offer to sell the property via short sale, the lender is required to expedite review of the offer and work to facilitate the sale. Foreclosures are to be viewed as a last resort. For any loan modification or short sale rejections, the lender must automatically review the reasons for denial and offer the borrower the opportunity to appeal the decision.

Lenders are also required to adopt procedures to make the loan modification application process easier on borrowers. Specifically, lenders must designate a particular employee as a single point of contact throughout the loan modification process. This single point of contact is responsible for explaining foreclosure alternatives and requirements to homeowners, keeping borrowers updated on the status of their modification application, and reducing the frustration of dealing with a different representative every time the borrower contacts their loan servicer. Additionally, lenders must provide benchmarks of anticipated decision times and create internet portals for homeowners to easily check the status of their pending modification application.

How Will These Changes Be Enforced?

The National Mortgage Settlement was agreed upon in February 2012 and approved by a federal judge in April 2012. From the date of approval, lenders have up to three years to adopt the servicing reforms. However, financial incentives are available to those lenders who comply with the new servicing standards within the first year. These incentives are designed to encourage lenders to implement reforms sooner rather than later.

An independent monitor has been appointed to oversee implementation of the Settlement. The monitor is tasked with measuring lender compliance with the requirements and providing periodic reports to the states and federal agencies party to the agreement. The independent monitor has the authority to impose fines of up to $1 million per violation. Additionally, individual attorneys general have the authority to seek federal court contempt citations against servicers who do not abide by the requirements of the Settlement.

How Do Borrowers Know If They’re Eligible?

a.   Former HomeownersThe National Mortgage Settlement administrator is currently working with lenders to identify homeowners who were foreclosed on between January 1, 2008 and December 31, 2011. By approximately the end of 2012, the administrator is scheduled to notify potentially eligible borrowers of their ability to make a claim for compensation if their home was foreclosed on during the eligibility period. Former homeowners will want to watch their mail and/or e-mail for correspondence from the Administrator of the National Mortgage Settlement or their former loan servicer. But also beware of scams. If you have questions about the authenticity of correspondence you receive referencing the Settlement, check for details on the Settlement program’s website.

b.   Current HomeownersTo be eligible for the loan modification or foreclosure alternative options under the National Mortgage Settlement, the borrower’s loan on their primary residence must be held by one of the five participating lenders:

That means the loan must actually be held by one of these institutions, not merely serviced by the bank. Loans owned by Fannie Mae or Freddie Mac but serviced by one of the participating servicers are not eligible for relief under this Settlement.

Fannie Mae and Freddie Mac loans are not eligible for modifications through this Settlement due to the position of their regulator, the Federal Housing Finance Authority. The FHFA believes this program could create incentives for otherwise-current borrowers to default on their loans in an effort to obtain a modification, which could further depress housing prices. Although the FHFA’s position has come under fire since the date of the Settlement and the Obama administration has offered the FHFA financial incentives to change its position, as of this writing, Fannie and Freddie-held loans are not eligible for modification under the Settlement.

Borrowers should contact their lender or loan servicer directly with eligibility questions.

What Does The National Mortgage Settlement Mean for Colorado Homeowners?

Former Colorado homeowners who lost their home to foreclosure are likely to receive a small amount of compensation. But if past federal foreclosure alternative programs are guides, while current Colorado homeowners are likely to receive some assistance, the aid will appear small when compared to borrowers in other states. The biggest change going forward will likely be in the way that Colorado homeowners interact with their lenders.

a.   Compensation if Home was Foreclosed

Colorado residents who lost their homes to foreclosure between January 1, 2008 and December 31, 2011 are likely to receive some compensation from this Settlement if they apply. With $1.5 billion being allocated to compensate those who lost their homes to foreclosure because foreclosure alternatives were not appropriately offered, and with payouts expected to be on the order of $2,000 per borrower, it is likely that many individual claims will be recognized as valid. In the Settlement, the lenders agreed to new servicing standards because they generally failed to present sufficient foreclosure alternatives to borrowers in the past. If a borrower lost their home to foreclosure between 2008 and 2011, they likely felt the effects of those failures. The message to Colorado residents who lost their homes to foreclosure during this period and meet the other eligibility criteria is simple: Apply for your share of the Settlement proceeds, because you’re likely to receive some financial compensation.

Colorado homeowners may separately be entitled to more than $125,000 each under the Independent Foreclosure Review program – which I write about here – if a foreclosure was improperly started or carried out against their residence. Applicants must apply for compensation under the Independent Foreclosure Review by September 30, 2012 – much earlier than claims must be submitted in the National Foreclosure Settlement.

b.   Modification Incentives for Current Owners

Based on other federal foreclosure avoidance programs already in place, current Colorado homeowners can expect moderate assistance with loan modifications and short sales, but should not expect much by way of principal reductions on loans. For instance, the 2009 Home Affordability Modification Program (“HAMP”) provided financial incentives for lenders to modify mortgages. The tools available through HAMP are to extend loan terms (to up to 40 years), reduce interest rates (to as low as 2%), and reduce principal balances. Certainly, many Colorado homeowners have received HAMP modifications that reduced their monthly payments by extending the term and/or reducing the interest rate of the loan. But reducing the loan’s principal balance is not typically a HAMP solution presented to Coloradans.

This is likely because lenders prefer to write off portions of principal loan balances in non-recourse states like California, Arizona or Texas, among others. In these non-recourse states, lenders cannot pursue borrowers for loan deficiencies after foreclosure sales, so there’s a clear financial incentive to simply write off the portion of the loan which makes a borrower underwater. But in recourse states like Colorado, where borrowers remain liable on the entire balance of the loan regardless of the value of the property, there is no incentive for lenders to let borrowers off the hook for any portion of the loan by reducing the amount owed. So even though about 40% of the total amount contributed in this Settlement is designed to reduce principal balances on underwater properties, Colorado homeowners should not expect much – if any – relief from those funds.

Although principal reductions may not be offered to Colorado borrowers, residents should receive value from the refinance and short sale provisions. If borrowers are upside down on their property but current on their payments, they may be able to reduce monthly payments by extending the term or reducing the interest rate of the loan. Financial incentives are also available to help over-extended homeowners avoid foreclosure by selling their home via short sale. However, while more than a quarter of the funds contributed in this Settlement have been allocated for this purpose, specific guidance as to implementation remains to be seen.

c.   Future Servicing Improvements

The biggest change that will affect the majority of Colorado homeowners – even if their loan is not held by one of the Settlement participants – is the expected increase in transparency when dealing with lenders. If a borrower defaults on their loan, the bank will have to designate a single point of contact to assist the borrower in understanding and applying for foreclosure prevention options. First, a loan modification must be considered. The contact will explain all necessary application documentation, provide a timeline of expected benchmarks in the process, and be available for questions through the process. Borrowers will be able to directly check on the status of their loan modification through the lender’s website.

If modifying the loan cannot keep the borrower in the property, the borrower must be given the opportunity to sell the property via short sale. The lender must review all denials of modifications or short sales and the borrower will automatically be given the ability to appeal any rejection. Only when all other available alternatives have been exhausted can the lender foreclose on the borrower’s property.

Conclusion

The National Mortgage Settlement will result in some financial compensation and relief for both former and current Colorado homeowners. Individuals who lost their home to foreclosure are likely to receive some amount of compensation, while current owners will be given the opportunity to modify their loan or sell the property via short sale on favorable terms.

I routinely assist homeowners in seeking loan modifications and other foreclosure alternatives. Please contact me if you have questions about the National Mortgage Settlement (or Independent Foreclosure Review) I, would like assistance in applying for the compensation or benefits to which you are entitled, or are generally seeking guidance about a property that was lost to foreclosure or is no longer affordable.