Robert Bostrom, former general counsel of Freddie Mac, is calling for heightened scrutiny of the blockbuster $25 billion mortgage settlement between government agencies and the U.S.’s five largest mortgage servicers. “The settlement is as revealing for what it excludes as for what it includes,” Bostrom tells Institutional Investor.
He warns that the settlement ignores potential civil and criminal claims. New York State Attorney General Eric Schneiderman, for example, is suing three of the big banks over their use of the Mortgage Electronic Registration Systems — known in the industry as “robo-signing” — which are said to have foreclosed on properties by mistake. Bostrom sees potential challenges for the servicers after the settlement is enacted. For one, the fee structure for servicing does not take into account the additional costs of managing defaulted or nonperforming loans.
The banks — Ally Financial, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo — have agreed to more-stringent regulation of their servicing and foreclosure practices as well as oversight of how they allow for homeowners to modify or restructure their mortgages. Bostrom, who was at Freddie Mac from 2006 to 2011 and now is a partner with law firm SNR Denton, says he thinks that the settlement is a step in the right direction but that it could still make it tough for servicers to adhere to the newly required standards of conduct.
“You’ve got roughly 25 basis points of servicing fee, and they make a little bit of money on performing loans,” Bostrom explains. “But the cost to service nonperforming loans under these new standards is three times that.” Despite the billions of dollars in relief promised to homeowners, the five banks will receive loan protection and credit toward the settlement. But the aid directed to mortgage balances only covers bank-owned mortgages, leaving homeowners who have Freddie Mac– or Fannie Mae–owned mortgages with no relief. The $308 billion in home equity loans held by the banks will receive protection in the form of loss-sharing on junior loans with bondholders.
The problem of robo-signed foreclosures may now be remedied, but a settlement that sends $2,000 checks to people who have lost their homes won’t do much to satisfy the general public, according to Bostrom. Still, the landmark settlement has its pluses: “People won’t be thrown out of their homes, and they’ll have more opportunity to modify their mortgages,” he says. “That’s good housing policy.”
