Homeowner Relief? The Recent Countrywide Settlement in Context
A recent settlement between the California Attorney Generals office, joined by 10 additional states, resulted in one of the widest reaching predatory lending settlements in US history.
Under the landmark agreement, Countrywide Financial’s new owner, Bank of America, agreed to proceed with loan modifications on nearly $8 billion in home mortgages, potentially affecting hundreds of thousands of homeowners.
“With this settlement, homeowners will receive direct relief from the catastrophic damage caused by Countrywide,” said Attorney General Brown. “Countrywide’s lending practices turned the American dream into a nightmare for tens of thousands of families by putting them into loans they couldn’t understand and ultimately couldn’t afford.”
We at LoanWorkout.org especially loved this comment by our lender slaying AG, “Unlike last week’s congressional bailout, this loan modification program provides real relief for borrowers at risk of losing their homes. Tragically, California and the other states have had to step in because federal authorities shamelessly failed to even minimally regulate mortgage lending.”
According to the terms of the settlement, the loan modifications may include potentially lower interest rate fees along with certain principal reductions, depending upon the individual home owner’s agreement (see Bank of America Settlement /Attorney General Settlement)
According to the plan, the payments would be modified so that they will not exceed 1/3 of the mortgage holder’s adjusted income, after accounting for interest, taxation and insurance costs (¼ for those whose fees are not strictly escrowed according to the original terms of the loan.) For participating states, such as Illinois and California, homeowners will be eligible based upon meeting requirements, and will not have to pay restructuring fees and can get a temporary respite from pending foreclosure processes if they qualify.
While the program begins December 1, Bank of America has been positioning the agreement to help boost its public reputation, stating in a press release the “creation of a proactive home retention plan that will systemtically modify troubled mortgages” (see USA Today – B OF A Press Release)
The Bank went on to state that the settlement creates a “comprehensive program….to sustained home ownership.” Under the program, the Bank will consider options including Federal Housing Administration Hope for Homeowners refinancing, certain interest rate reduction plans and trades of home equity for reduced principal.
Banks have historically resisted lowering principal on home loans, but the swap for home equity satisfies bank’s concerns regarding the core value of the investment: when Bank of America takes a larger proportion of a smaller loan, they can potentially retain their investment, on net.
The settlement also created a “Foreclosure Relief” fund of $150 million for states to help home owners who can only afford minimal payments on their loans and an additional $70 million to help provide transition funds for those who have or will lose their homes through foreclosure. A large issue are Countrywide originated loans which were re-sold and packaged into securities to other banks and lenders – the press release states that just over 10% of eligible loans are held directly by Bank of America, leaving hundreds of thousands of home owners outside of the system vulnerable.
While the settlement covers loans that are managed by Countrywide, even if they originated from other lenders, it does not strictly cover all loans that originated from Countrywide but then we re-packaged and syndicated to other lenders, which became a common practice. As a result, you’ll want to check with your bank and your state attorney general’s office to determine whether you qualify for the loan settlement agreement.
While Bank of America states they will be contacting qualified homeowners, it’s best to reach out and see if you qualify in advance.
The effects of the settlement vary widely depending on the conditions of the loan. Although the modifications may help some homeowners, it cannot address structural problems that may still leave even adjusted rates out of reach for a growing number of homeowners.
Although critics credit Bank of America with an initial approach, many believe that is still does not go far enough and instead reflects both public and private financial pressures rather than representing a long term attempt to solve the problem. Many participating states believe that the agreement is just a first step in a larger scale modification with additional participating banks (see Washington Post)
While the Bank did not pay any fines to the government or admit any harmful actions on its part as part of the larger settlement, it did agree to what is considered one of the largest financial real estate settlements in recent years.
The suit really targets a small segment of loans which were addressed to the sub prime market with short-term, teaser interest terms that have become the target for recent scrutiny, leaving a much larger set of mortgage holders outside the direct reach of the settlement. Those with subprime or adjustable rate, pay option loans (option adjustable rate mortgages or ARMs) may see reduced interest rates under the settlement relative to the borrower’s income.
Regulators began to look at both the home owners who did not strictly fall within these guidelines, as well as the dozen or so major home lenders who did not take part in the settlement agreement (see Los Angeles Times)
Part of the settlement allows the Attorney Generals the right of first refusal on the settlement if Countrywide doesn’t reach more than 50,000 loan modification agreements before March 1, 2009, which is considerably lower than the nearly 400,000 loans which potentially qualify for the new terms.
Countrywide/B of A plans to begin contacting eligible borrowers starting December 1, although only those who are more than 60 days delinquent on their loan will receive first contact. Importantly, the settlement is still disciplined by profit potential on the part of the bank: only loan modifications that will produce revenue greater than or equal to what the banks could recoup directly through standard foreclosures will be considered, while those whose adjusted incomes are above the threshold for qualification also will not be offered modifications.
Given all of these details, you may wonder how exactly the settlement will affect your individual case – given the number of variables in play, each case will be evaluated individually by loan modification officers. To help you sort through some of these details, we have dissected some of the more intricate parts of the settlement. Always consult with an attorney or debt counselor before taking any specific actions.
What Homeowners Need to Know
Even if you quality for the settlement program, you will, generally, be notified starting on December 1. Independent of your qualifications, however, you still are obligated to make payments on your existing loan agreement until the modification fully goes into effect; as a result, you should always go forward assuming that you will have to make complete payments on the existing loan until you receive a firm modification offer (even after receiving an offer you should consult with a professional advisor to go over the details.)
Keep in mind that if your home is currently in foreclosure, the settlement does not reverse the procedure unless you meet the specific terms of the agreement – while you can consult the lender, they are not necessarily legally obligated to stop all foreclosure proceedings that have already begun, and are only suspending proceedings for those who meet the narrow terms as outlined in the agreement (this affects some 390,000 home owners, leaving many more outside of the scope.) As a result, you’ll have to contact a private attorney to help you navigate the individual details of your situation.
Keep in mind that loan modifications, under the settlement, are restricted to homeowners who are more than 60 days delinquent on their current subprime or pay option, ARM mortgages that are managed by Countrywide. If you have a loan with another lender, then your particular situation does not strictly apply to the settlement, and you will have to pursue the normal channels of working with your loan modification offices to reach a mutually acceptable agreement. Additionally, if you have another form of loan with Countrywide or if you originated your mortgage before 2004 or since the beginning of this year, then the settlement terms also will not apply in your case.
The equity of your home also plays into the equation: if you owe less than 3/4 of the current market value of your home, then the loan modification agreement also will not apply to your case. While this leaves out a large pool of borrowers, there are still other routes that you can take to reaching a new agreement, namely working with Countrywide on an individual basis to reach an agreement.
The exact terms of your modification will be determined by Countrywide as a product of the criterion they established to reflect both the income of the borrower, as well as the appraised value of the home relative to the principle amount. While most borrowers will be eligible for a reduced interest rate option or transformation of their loan to an interest-based mortgage over a shorter time period (generally, the conversions will be to five or ten year terms.)
The lowering of principle amounts is determined at the discretion of Countrywide, and is a function of the current market value of the home and your home equity position – only those who owe above 95% of the current home value might qualify (although home values can be subjective, Countrywide determines these based on 3rd party appraisals.)
Further, the exact interest rate reductions are determined by Countrywide, which can issue either temporary or permanent modification offers on interest – while some instances may provide temporary reductions at 3.5% or below, each case will be evaluated individually according to the agreement.
Keep in mind that the modification offer must be mutually agreed upon by both parties, and no fees can be levied under the terms of the settlement. If you are currently up to date on your loan, but anticipate financial pressures in the near future, then the terms of the agreement extend until June 2012 for those who qualify. (see California Attorney General News)
If you have already been through foreclosure proceedings, then you may qualify for compensation under the terms of the agreement. In particular, the agreement provides certain compensation amounts for those who qualify under the terms and have already been through proceedings may qualify for payments based upon a pool of compensation provided by Countrywide to the states (Attorney General offices expect to contact eligible individuals before the end of the year – you should contact your Attorney General’s office to determine the exact structure of this compensation.)
Although the loan modification offers will be applied nation wide, this compensation is only available to homeowners in states which participated in the settlement agreement which include California, Texas, Connecticut, Florida, Illinois, Iowa, Michigan, North Carolina, Ohio, Arizona and Washington.
Settlement in Context: State of the Mortgage Market
While these modification offers are a starting point for starting to address the larger mortgage issue in the country, they only affect a portion of homeowners who have distressed loans and the economic environment continues to deteriorate.
One particular issue is that even if you qualify for a loan modification, the uncertainties in the job market continue to put pressure on mortgage holders nationwide.
As a result, the larger issue of helping to ease the global recession is of foremost prominence for most home owners. Although lenders have been more willing to negotiate modification offers in recent months due to growing financial pressures on their balance sheets from adding property, as well as the litigation costs of foreclosure, the pending public policy actions of the Obama administration with respect to the mortgage market will have a larger effect.
The government’s recent, complete take over of Fannie Mae and Freddie Mac sheds led on the future path that public policy might take – on going losses at these companies have cost the government nearly $30 billion this past quarter, and has turned a once multi-billion dollar mortgage institution into one that may have a difficult time turning a profit for the foreseeable future (see CNN Money).
Ever since the government placed the company under Treasury department control in September, Fannie Mae and Freddie Mac have emerged as largely the only major company that has been able to hedge its investments to re-selling mortgage securities in the after market, due to its implicit government insurance backing. While Congressional authorization allows the Treasury department to back the entire balance sheets of the companies, the only way to truly turn the market around will be by invigorating a more stable, secure private lending sector.
Countrywide, which was once the largest private mortgage originator and backer in the nation (at one time, nearly 1 in 5 mortgages in the country were managed by the company), has transformed under Bank of America’s ownership since the buy out in July. Recently, Bank of America announced that they incurred over $16 billion in losses from the loan portfolio from Countrywide’s debt (see USA Today)
While Bank of America remains a solid under-writer of Countrywide’s debt, as one of the largest banks after its recent acquisition of broker Merill Lynch, it limits the bank’s ability and willingness to expand into the loan market. As a result, the credit market for new loans remains severely limited in this credit environment, and limits the potential options for home owners that fall outside of the scope of the settlement.
Other private lenders who fall outside of the scope of the settlement are further incurring losses and looking to shore up their balance sheets. Whether mortgage institutions are focused on avoiding bankruptcy themselves, they will only offer loan modifications where it is in their short-term interest to do so, outside of any intervention by the federal government.
Take the case of Res Cap, which is the mortgage brokerage owned by troubled lender GMAC Financing (which has been hit with difficulty related to its mortgage portfolio, as well as the declining value and volume of its auto loan business – not to mention the larger troubles at parent company General Motors.) Some analysts believe that ResCap may have difficulty operating under current market conditions in terms of meeting their collateral agreements to their own lenders (see Reuters)
These analysts believe that a larger public intervention to help parent GMAC and its General Motors owner will be necessary to help shore up the balance sheet of small and medium sized lending institutions, under increasing pressures from their financiers. Under these conditions, small brokerage firms such as Home Mortgage Investment, Indy Mac and New Century have had to restructure, while others such as Wachovia merged with larger companies to shore up their balance sheets.
The homeowner legislation passed this year (in 2008) leaves a window in which the government will likely have to supplement it with further legislation int he near future. The economic stimulus package first passed in February has many provisions which expire on December 31, including reduced interest rates on Fannie Mae, Freddie Mac and Federal Housing Administration loans. Additionally, the increased caps on so called “jumbo loans” that are insured by the government will also lapse at the end of the year, while private lenders will begin phasing them out in advance of that window (see San Jose Mercury News)
While the government originally planned legislation believing that we were in a “shallow” recession, recent evidence suggests the problem is deeper and requires more public intervention than originally believed.
In recent weeks, mortgage rates have dropped as funds have become less expensive at the wholesale level – the Federal Reserve dropped short-term interest rates at its last meeting amid declines in the larger economy, including a loss of nearly 240,000 jobs this past month. As a result, 30-year mortgage rates have fallen below 6.5%, although lenders are becoming increasingly choosy as to the loans they originate, given the difficulty on hedging or repackaging the loans.
Given the direct nature of lending today, nearly every bank has raised its lending standards, even for borrowers with the best credit ratings, requiring higher down payments, with larger interest rates on stricter repayment terms (see Reuters)
Despite lower interest rates, the lower cost of capital borrowing has had little effect on unfreezing credit markets, as lender’s are focused on shoring up their balance sheets before growing their new business, weary of taking on larger balance sheets which they cannot readily hedge or insure against further deterioration in the markets (see Forbes) Even as the real rate of borrowing effectively approaches zero, recent loses in the mortgage markets have made lender weary of borrowing at any cost.
The Obama administration will come into office in January battling these tough economic conditions, and will have to further intervene in the markets to assure that a broader set of homeowners are protected from foreclosure beyond the limited scope of nationwide settlements with Countrywide and J.P. Morgan, along with voluntary agreements reached between certain lenders and borrowers.
While consumer spending remains the majority of economic activity in the country, consumer confidence levels fell to an all-time low, suggesting that returns on capital will remain low for the foreseeable future (see Forbes)
Because of this, banks are further reluctant to lender, given their anticipation of further reductions in the rate of return from their existing investments – they are focused on maximizing their “cash on hand” as an effective insurance hedge against their own investment positions, rather than taking on new business.
President-elect Obama has proposed a 90-day stay on foreclosure proceeding as well as increasing mortgage tax credits and giving bankruptcy courts more leeway over potential lender abuses of the system (see San Francisco Chronicle).
While an Obama administration will have to work with Congress to shape the next round of mortgage legislation, the urgency of the issue, as reflected in the limited scope of recent private settlements has come to the forefront.
{ 3 comments… read them below or add one }
March 8, 2009
To Whom It May Concern:
Please find the attached letter regarding our hardship and struggles that have been ongoing with Bank of America regarding our mortgage. We were approved for a loan modification based on our hardship letter in August 2008. In May of 2007, Ron got injured on his job and has been out on worker’s compensation disability, thus making his income considerably less. While Ron has been out on disability, he has had 5 surgeries on his back and his since been terminated from his job.
While being out on disability, we started our process by contacting the HOPE program. They told us that, “we shouldn’t have bought a house we couldn’t afford.” Since they were of no help, we then contacted Bank of America on our own. But, since our approved loan modification in August, we have had nothing but problems with Bank of America. Our monthly payment amount has changed several times, starting at $1839, then going up to $1875, then going back down to $1798, and going up to $1946. All of these inflations of our mortgage payment have been in the past 6 months. We are afraid that those numbers are going to continue to go up as the pattern is showing. One day we spoke to a few different people from Bank of America and were literally given 3 different payment amounts, in one day!!!! We have never missed a payment, but depending on which department you speak to they may tell you that we are over 6 months delinquent, which they reported to the credit bureau. If you speak to the loss mitigation department, they’ll tell you we are current.
Our Congresswoman as well as our State Senator has tried to assist us. This is the only time that Bank of America will listen or deal with us. We are at our whit’s end and so unbelievably frustrated that we don’t know where else to turn. We have continued each month to make a payment and would like to keep our house. Unfortunately, the loan modification is not really a modification in our payments, they are still too high. Bank of America informed our Congresswoman that they would like to work with us, but then they tell us that there’s nothing they can do.
We would greatly appreciate any assistance you can offer us.
Sincerely,
Ron and Robyn Markowicz
I have a Countrywide/BoA mortgage. I was making the payments. BoA in Aug 2009 refused to take the payment and three days later they foreclosed on us. We have been able to get the sale date moved back, but as of date have not been able to resolve this problem. Countrywide modified the ARM on the house and BoA chose to not honor the modification. They now want us to pay thousands of dollars to modify the mortgage. This does not sound like the workings of a bank that has agreed to work with customers to keep them in their homes. My husband has worked for the same company for the past 38 years and continues to work there. So what is the answer? Does the band continue in the same manner despite the settlement? We are still waiting for answers and help.
Judy, depending on what state you are in see if there is a local attorney who can look over you mod. I had the same problem and brought it to an attorney and he now going after BOA because they have no legal standing to not honor my first mod. It wasn’t even a temp mod, it was a straight mod and I have made all my payments as required so I understand.