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State AGs want principal adjustments before foreclosure
WASHINGTON (3/10/11)—Federal legislation that proposed to permit judicial modification of mortgage terms under the bankruptcy law--typically referred to as “cramdowns”-- has been defeated in recent years. However, a group of state attorneys general and several federal agencies have been negotiating a settlement agreement with the major mortgage servicers which could create a possible loan modification process that could be viewed as having a similar result, at least for the servicers subject to the agreement. This settlement agreement is intended to resolve enforcement actions that have been brought against the mortgage servicers. Credit Union National Association (CUNA) General Counsel Eric Richard said that although credit unions are not subject to such enforcement actions, CUNA continues to monitor these for any possible impact on credit unions. Last week, the attorneys general circulated a 27-page outline of what they would like to see in a settlement agreement to address concerns about how mortgage servicers have handled foreclosures. The mortgage servicers are now reviewing the proposal, so nothing is finalized, Richard emphasizes. Included in the “remedies” proposed by the attorneys general are “a loss mitigation duty,” which would require covered servicers to “thoroughly evaluate borrowers for all available loss mitigation options prior to foreclosure referral.” This would apply to all eligible borrowers, including borrowers in bankruptcy. Servicers subject to the agreement would have to “facilitate” modifications, such as helping to fill out the application, when a modification would result in a greater “net present value” (NPV) than foreclosure. Servicers would be expected to “consider and apply” reductions in principal and in bankruptcy cases to reduce the interest rate on a mortgage loan to zero percent for the first five years. The proposed agreement envisions the new Consumer Financial Protection Bureau involved in monitoring the calculation of the NPV, as well as other aspects of the agreement. “Including the CFPB in the proposed settlement document raises questions as to whether some terms of the agreement could become standards applied to mortgage lenders in general,” Richard noted. “It’s also unclear how the brief reference that servicers’ loan modification programs are to modify secondary liens could work in practice. These are some of the provisions that CUNA is tracking closely.” The proposed agreement attempts to address a wide range of problems that have come to light about servicers and the foreclosure process, including: Robo-signing of documents with no verification of accuracy; failure to document the chain of assignment; the inability of borrowers and housing counselors to communicate with servicers; failure of temporary modifications being made permanent after months of on-time payments by borrowers; violations of the Servicemembers Civil Relief Act; and failure of servicers to respond to short sale offers. Use the resource link for the settlement terms document.
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