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Thursday, February 24, 2011 12:39 AM


Obama Seeks $20 Billion in Civil Fines, Money to be Used for Loan Modifications; How Far would the Money Go?


The Wall Street Journal reports U.S. Pushes Mortgage Deal

The Obama administration is trying to push through a settlement over mortgage-servicing breakdowns that could force America's largest banks to pay for reductions in loan principal worth billions of dollars.

Terms of the administration's proposal include a commitment from mortgage servicers to reduce the loan balances of troubled borrowers who owe more than their homes are worth, people familiar with the matter said. The cost of those writedowns won't be borne by investors who purchased mortgage-backed securities, these people said.

If a unified settlement can be reached, some state attorneys general and federal agencies are pushing for banks to pay more than $20 billion in civil fines or to fund a comparable amount of loan modifications for distressed borrowers, these people said.

But forging a comprehensive settlement may be difficult. A deal would have to win approval from federal regulators and state attorneys general, as well as some of the nation's largest mortgage servicers, including Bank of America Corp., Wells Fargo & Co, and J.P. Morgan Chase & Co. Those banks declined to comment.

A settlement could help lift a cloud of uncertainty that has stalled the foreclosure process since last fall. Economists have warned that foreclosures need to proceed for the housing market to continue on a path to recovery. It's unclear how many borrowers would benefit from a deal.

Under the administration's proposed settlement, banks would have to bear the cost of all writedowns rather than passing them on to other investors. The settlement proposal focuses on pushing servicers who mishandled foreclosure procedures to eat losses, by writing down loans that they service on behalf of clients. Those clients include mortgage-finance giants Fannie Mae and Freddie Mac, as well as investors in loans that were securitized by Wall Street firms.
How Far would the Money Go?

Let's assume this proposal is adopted. How many would benefit? The answer of course depends on the criteria. However, but the goal seems to be to help those in distress, so let's use those currently in distress as a starting point.

Total Non-Current and Delinquent Loans



The above chart and following stats from the LPS Mortgage Monitor, January Observations

  • As of December 2010 there were 2,117,845 90+ day delinquent loans.
  • As of December 2010 there were 2,555,799 30-60 day delinquent loans.
  • As of December 2010 there were 2,195,940 in foreclosure.
  • As of December 2010 there were 6,869,584 in total non-current loans

Those in foreclosure are clearly too far gone to help. If we take $20 billion and spread it out over the rest, we can calculate mortgage principal reductions several ways.

  • $20 billion divided by 2,555,799 would give everyone 30-60 days late a principal reduction of $7,825
  • $20 billion divided by 2,118,845 would give everyone 90+ days late a principal reduction of $9,439
  • $20 billion divided by both groups would give everyone a principal reduction of $4,278

This is supposed to help?

By the way, history suggests once someone gets to 90+ days late, the situation is hopeless. Even if the $20 billion was entirely thrown at those 30-60 days late, we are talking about principal reductions of under $8,000.

The moral of this story is $20 billion isn't what it used to be.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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