Tearing down homes will count toward mortgage settlement

Wells Fargo's year-end report filed yesterday with the SEC provides the most complete details of how banks will be able to meet their commitments in the $25 billion mortgage servicing settlement reached earlier this month.

Among the more interesting items: Banks will get credit toward their totals for tearing down homes and forgoing lawsuits against underwater borrowers who lost their homes to foreclosure.

Banks will also receive extra credit for forgiving principal in the next 12 months. All actions must be taken in the next three years.

Each bank involved in the settlement has a certain amount of principal reduction and other foreclosure relief they are required to provide. Bank of America will provide $7.6 billion in relief, part of its $11.8 billion total. Wells Fargo will provide $3.4 billion in relief, part of its $5.3 billion total.

Not each dollar spent or forgiven will get full credit toward the banks' total. Wells Fargo broke down some of the partial-credit percentages, which also revealed some of the options the banks have.

An incomplete list:

Principal forgiveness. Banks will receive 100 percent credit for principal forgiveness where the borrower's loan-to-value ratio is less than 175 percent. Any principal forgiveness at a higher ratio will receive 50 percent credit.

Deficiency balance waivers. Banks will receive 10 percent credit for waiving their right to sue borrowers who have lost their homes to foreclosure, but the value of the home did not pay off their debts. Such suits are called deficiency judgments.

Transitional payments. Banks will receive full credit for any "transitional payments" given to borrowers in conjunction with a short sale or deed-in-lieu. These programs are sometimes known as "cash for keys." If an investor owns the loan, though, the bank receives only 45 percent credit.

Anti-blight. Banks will receive full credit for money spent tearing down homes. The bank will also receive full credit for donating properties to nonprofits.

A full list can be found on page 75 and 76 of Wells Fargo's annual report to shareholders.

Even though the formal settlement has yet to be filed in federal court, banks will receive credit for actions taken beginning March 1.