Tuesday, November 20, 2012

Where do the banks really stand on mortgage relief?

The national mortgage settlement progress report yesterday came with an eye-popping number: $26 billion in  total homeowner relief.

In reality, they're probably closer to half that.

As we noted, the banks don't get full credit for every form of homeowner help they provide. Take Bank of America. Here's what was reported from them yesterday:

  • First-lien principal reduction: $889 million
  • Forbearance forgiveness: $231 million
  • Second-lien modifications and extinguishments: $2.355 billion
  • Short sales completed: $7.435 billion
  • Deficiency waivers: $549.9 million
  • Borrower transition funds: $66.9 million
  • Refinance relief: $53 million
Total: $11.76 billion (approximately)

In a quarterly report earlier this year, Wells Fargo disclosed how some of these programs will be credited. Here's what Bank of America's figures look like weighted. Assumptions I've made appear below.
  • First-lien principal reduction: $889 million x 100% credit = $889 million (1)
  • Forbearance forgiveness: $231 million x 40% credit = $92.4 million
  • Second-lien modifications and extinguishments: $2.355 billion x 50% = $1.178 billion (2)
  • Short sales completed: $7.435 billion = ($7.435b * .60 * 20%) + ($7.435b * .40 * 100%) = $3.866 billion (3)
  • Deficiency waivers: $549.9 million x 10% = $55 million
  • Borrower transition funds: $66.9 million = ($66.9m * .60 * 45%) + ($66.9m * .40 * 100%) =  $44.9 million (4)
  • Refinance relief: $53 million * (unknown) = $53 million

Total: $6.2 billion (approximately)

(1) First-lien principal reduction only gets full credit if the loan-to-value ratio on the home is less than 175 percent. Otherwise, the amount over that gets only 50 percent credit.
(2) Second-lien modifications get different credit depending on how delinquent the loan is and how troubled the borrower's situation is overall. I chose the middle-ground number because of what the bank had already disclosed.
(3) Short sales can be credited between 20 percent and 100 percent depending on who owns the loan and takes the loss. Bank of America has said that 60 percent of its relief is going to investor-owned portfolios, and the rest bank held.
(4) The transition funds are credited similarly to the short sales.

Granted, this is an extremely rough estimation. It's impossible to know exactly where the banks stand until monitor Joseph Smith and his professional firms do the work of crediting everything. The banks also get extra credit for offering relief in the first year of the settlement, as opposed to years two and three.

But the banks' true standing is clearly well behind the large numbers reported yesterday. Still, Bank of America has three years to give about $9 billion in total homeowner relief, so it's making progress.

If you apply the same formula to the whole pie, you get a much more realistic $12.6 billion. About half of what was reported yesterday.

About those short sales

More than half of the relief has come in the form of short-sales, which force the borrower from their home. That seems counter-intuitive to the settlement's stated goal of keeping people in their homes.

The settlement's architects defended the volume of short sales Monday.

"Short sales are very important for the market," Colorado attorney general John Suthers said. "Get (the homes) back on the market, get them purchased by those who can afford to live in them."

By the end of the period, a maximum 40 percent of the total relief can be from short sales.

Principal reduction (either first- or second-lien) must be 60 percent. First-lien must be 30 percent.

Investors trimmed?

You probably noticed in the notes above that Bank of America's mortgage relief has been split 60-40 between investor-owned and bank-owned loans, with investors taking the biggest hit.

That investors would end up taking the biggest losses from the settlement has been something the financial  community has feared since the settlement was announced. Bank of America is the only bank involved in the settlement to say what its breakdown looks like.

Housing and Urban Development secretary Shaun Donovan told reporters Monday that while they expected Bank of America to work primarily in investor-owned loans (since Countrywide loans were by and large sold), they don't think the other banks will be the same way. He said Wells Fargo has even said they won't do any work in investor portfolio loans.

"Overall what you will see is that investor-owned loans make up a minority, a small share overall of the loans that benefit from consumer relief," he said. "That's very consistent with what we expected to see."