One Mortgage Settlement (Nearly) Down, But How Many More to Go?

WASHINGTON — After a yearlong effort to reach a multistate settlement with the top five mortgage servicers, state attorneys general and the firms involved finally appear to be close to a deal.

But even before it is signed, there are already questions about how it will be implemented and future litigation risks.

Industry observers said that while the basic framework of the settlement has emerged in recent weeks — state attorneys general had until Monday to decide to join — the devil will be in the details, which could still be subject to last-minute adjustment.

While both sides will be relieved to put the settlement behind them, mortgage-related issues will continue to plague the industry.

"From a market perspective, I think investors have been expecting a deal for some time, so there will probably be some relief, because it's just another headline that's out of the way," said Brian Gardner, an analyst with Keefe, Bruyette & Woods Inc. "At the same time, we're telling folks just be cautious. This does not absolve them of all legal problems connected to mortgages."

"This is important," Gardner added, "but it's one set."

The proposed settlement could total up to $25 billion, and would require servicers to provide roughly $17 billion in direct relief to distressed borrowers in the form of principal reductions or other measures, including short sales or loan forbearance. Servicers would receive credit for different relief actions, with certain types of principal write-downs earning more credit than short sales, for example.

The final settlement amount still depends on whether California AG Kamala Harris signs on. Harris walked away from negotiations in September, and two weeks ago called the latest proposal inadequate for California borrowers.

But media reports surfaced Monday that Harris had come back to the table, and was in direct conversations with the administration over the final details.

"For the past 13 months we have been working for a resolution that brings real relief to the hardest-hit homeowners, is transparent about who benefits and will ensure accountability," Harris said in a statement released Sunday night. "We are closer now than we've been before, but we're not there yet."

Another $3 billion would go toward a refinancing program for underwater borrowers, and approximately $5 billion would go to the states and federal government for foreclosure-related initiatives, and remediation payments for certain borrowers who suffered specific servicing abuses.

Just as important as what the deal would include is what it does not cover.

For example, the settlement is not expected to preclude individual borrowers from filing suit against a bank, or from participating in a class action lawsuit. While it would reportedly release servicers from origination claims, it would not release them from securitization claims, which are approaching the statute of limitations in many states.

"Depending on how broad the waiver is, I would suspect to see a flurry of suits brought by some AG's on the securitization issue," Gardner said.

Many view the origination and securitization issues as interrelated, and say the exact language in the settlement is critical to determining the banks' exposure, especially in light of the new Justice Department working group headed by New York Attorney General Eric Schneiderman.

Although some expected the creation of the working group to help facilitate a final settlement deal, they said it assures that mortgage-related problems will stay in the headlines for months.

Indeed, Schneiderman filed a lawsuit Friday against Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co., alleging that the banks' MERS database — created to facilitate the packaging of mortgage loans into securities — led to improper foreclosures.

Servicers are also still dealing with the consent orders from the Office of the Comptroller of the Currency and the Federal Reserve Board, which require them to undertake an exhaustive review of foreclosures and provide remediation to injured borrowers. That process is expected to cost millions and could potentially take years to complete.

Isaac Boltansky, an analyst with Compass Point Trading & Research LLC, said there is also growing concern about lawsuits from private label investors.

"You can see the political side of this," Boltansky said. "Should state and federal retirees end up bearing the ultimate cost for these wrong doings by servicers?"

Questions also remain about the formula the settlement will use to determine credit for servicers who provide borrower relief. It will be up to banks to determine which actions to take, and which borrowers will receive relief.

The could prove to be more beneficial for banks that purchased mortgage portfolios at a discount at the height of the crisis, including Bank of America (Countrywide), JPMorgan Chase (Washington Mutual) and Wells Fargo (Wachovia), Boltansky said. Because those loans were already purchased at a discount, the cost of writing down the par value of the loan is less.

"How is this formula going to account for the fact that the purchase occurred at a discount? Will it?" Boltansky asked. "Those are the types of things that we'll be looking for."

It's also unclear whether servicers will receive credit for other modification efforts, including those already taken voluntarily or through programs such as the Home Affordable Modification Program. The industry is also eager to see whether negotiators included a so-called "favored nation" clause, which would allow states to take advantage of the terms of any subsequent deals that banks may strike with states that didn't sign on to the settlement, if those terms are more beneficial.

Ultimately, the question remains: is the deal good for banks? Observers said it's too early to know. But at the very least, it puts one chapter behind them.

"I've been very critical of big mortgage lending banks, but I do not think it's to anyone's advantage that they continue to bleed for years to come," said Arthur Wilmarth, a professor at George Washington University's School of Law. "So this would draw a line under, at least, a significant part of their potential liability."