TheMReport

TH E M REP O RT | 47 O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T SERVICING THE LATEST HUD Secretary: 2012 Settlement Delivered on Promises Donovan speaks about his hotly debated accomplishments before he bows out. A fter nearly five and a half years spent trying to steer housing out of a ditch, HUD Secre- tary Shaun Donovan is stepping out of that role—but not before taking a victory lap. In an interview with the Washington Post, Donovan looked back on his time spent directing the agency, reflecting on memo- ries ranging from the adminis- tration's reaction to Hurricane Sandy to its efforts to reduce homelessness. Out of all the memories from the tumultuous past half-decade, Donovan described to the Post one stand-out moment: when he informed the president that a $25 billion deal had been reached with what at the time were the nation's biggest servicers—and was rewarded with a hug. "I told him it was one of the most important things we could do to move the housing market forward, and that, in fact, turned out to be true," Donovan said, adding that the settlement "deliv- ered not just what we promised for the president but far more." Whether or not the settle- ment accomplished as much as Donovan says has been the subject of debate among mar- ket analysts and politicians. In a post published on financial blog CreditSlips.org at the time, Adam Levitin, law professor at Georgetown and a member of the Consumer Financial Protection Bureau's Consumer Advisory Board, called the settlement "a drop in the bucket relative to the scale of the problem" of negative equity and unemployment. "At best it makes some incre- mental improvements and helps a small number of homeowners," Levitin said. "But at worst, it lets the banks off the hook for the largest financial crime in history." More recently, the 2012 agree- ment has spurred policymakers to push for greater transparency in how federal agencies reach deals with companies and people. Earlier this year, Sens. Elizabeth Warren (D-Massachusetts) and Tom Coburn (R-Oklahoma) in- troduced the Truth in Settlements Act, which would require details on all agency settlements that include more than $1 million in payments. In a fact sheet released with the bill, Warren's office cites the National Mortgage Settlement, noting $17 billion of the $25 bil- lion agreement was in credits, "much of it for routine conduct." Questioned on related topics, Donovan asserted that housing finance reform is the "single most important thing" the government can do right now to accelerate the currently struggling recovery. More notably, he reaffirmed his belief that the Johnson-Crapo housing bill might be the only chance lawmakers have this decade to achieve reform. "Getting a bipartisan bill through the banking committee was a major accomplishment, and if we don't continue that momentum, I'm concerned that the opportunity will be lost with changes in committee or in seats after the election this fall," he told the Post. a nationwide class of borrowers for $300 million and agreed to reimburse or credit affected bor- rowers 12.5 percent of any LPI premiums they assessed. And in February, Citibank and a class of borrowers agreed to a $95 million settlement in which the lender also agreed to reimburse or credit affected borrowers 12.5 percent. The trouble itself stems from GSE-serviced mortgage holders defaulting on Fannie/Freddie- required coverage. Fannie and Freddie's servicers are required to ensure that their client home- owners maintain hazard insur- ance for the life of the mortgage. These servicers often outsource the tracking of this insurance and the payments to specialty insurers. When an insurer identifies a payment lapse, it initiates LPI coverage, which homeowners are expected to keep up with. However, not all do, and in the event of a foreclosure, Fannie and Freddie get stuck with the bill. In 2012 and 2013, insurance regulators in several states de- termined that LPI rates in their respective states were excessive and may have been driven up by profit-sharing arrangements with- in which servicers were paid to steer business toward LPI pro- viders in the form of commission structures and reinsurance deals. This, of course, led to the class-action suits that have so far amounted to $674 million in settlement payments. Last November, the FHFA sought to mitigate financial harm to Fannie and Freddie by directing them to prohibit their servicers from re- ceiving LPI-related commissions and entering into reinsurance ar- rangements with LPI providers. But those new rules did not take effect until June 1, and the grand total for how much the GSEs are missing due to LPI-related issues is not yet clear. The FHFA is still consider- ing whether Fannie and Freddie should pursue litigation against servicers and LPI providers to recover potential damages that the enterprises have lost cleaning up LPI-related messes.

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