April, 2012

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FEATURE SERVICING Settling Up What does the government's settlement with servicers really mean for industry professionals? By Adam Weinstein R emember "Joe the Plumber"? Back in 2008, he had a conversation on the economy with then-candidate Barack Obama. The presidential contender told Joe: "I think when you spread the wealth around, it's good for everybody." Well, the wealth is being really spread around now. The nation's five largest mortgage servicers fi- nally cemented their long-rumored settlement with state and federal regulators: The banks will set aside $25 billion to prop up the still sag- ging housing markets, compensate homeowners who were subject to unsavory servicing practices, and save thousands more from imminent foreclosure. According to the Justice Department, it's the largest state-federal civil settlement in U.S. history. The broad strokes are simple: Ally Financial Inc. (formerly GMAC), Bank of America, Citigroup Inc., JPMorgan Chase, and Wells Fargo & Co. have agreed to pay out $20 billion for borrower relief and $5 billion to Uncle Sam and 49 state attorneys general. (Oklahoma begged out of the settlement, negotiating its own arrangement with servicers.) 52 | THE M REPORT "We commend the federal and state agencies for their focus on these abuses and their commit- ment to homeowners devastated by the foreclosure crisis," National Consumer Law Center (NCLC) attorney Diane Thompson told reporters after the settlement was reached in February. Great! But how does that money get divvied up? What programs are in place to get relief to folks who need it most? And are there any clear winners and losers? As usual, the devil is in the details, and with so much money and so many parties in- volved, there are a lot of details. The Winners F irst and foremost, the biggest winner is the U.S. economy. Major financial trends are based on perceptions, and this settlement has largely been perceived as a victory for taxpayers, governments, homeowners, and even the banks themselves. That latter point may come as a surprise: No bank likes to take a billion-dollar hit to its bottom line (or an $11.8 billion hit, in the case of the largest payer, Bank of America). But with new servicing standards on the way— from foreclosure mitigation to creating a single point of contact— these servicers get the benefit of some much-needed positive PR, which could salve the crisis of confidence they've suffered with consumers through the bubble. What's more, the banks' capital hit should be "negligible," states Standard & Poor's credit analyst Rodrigo Quintanilla. "We don't expect this settlement to have a negative impact on the ratings on these banks," he wrote in a mid-February report on the deal, adding that the tentative terms of the settlement had been known for more than a year. "Consequently, the banks have had some time to prepare, and we believe they are well reserved for the settlement's costs." The other big winners are the states, particularly the ones hit hardest by the foreclosure boom. Arizona, California, Florida, and Nevada stand to collect the lion's share of the settlement money— about $29.5 billion altogether, ac- cording to numbers collected by SNL Financial. Perhaps surpris- ingly, that's just fine with officials from some of the states with smaller settlements. You've got to take care of the biggest markets first, said Andrew Ketterer, a former Maine attorney general and ex-president of the National Association of Attorneys General. "There's got to be enough sugar out there for California to get a share that they're happy with," he told SNL. You may have noticed already that these numbers don't quite add up: How do four states get nearly $30 billion out of a $25 billion settlement? Call it the new math, according to Iowa Attorney General Tom Miller, one of the key movers of the deal. Depending on their offenses and the programs they pay into, servicers won't automatically get dollar-for-dollar credit on all their contributions, he explained in a February press conference: "Sometimes they get a dollar-for- dollar credit, sometimes they get 45 cents on the dollar, sometimes they get 10 cents on the dollar." The sooner they pay up, the less they'll ultimately have to spend. SECONDARY MARKET ANALYTICS SERVICING ORIGINATION

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