David Dayen | Foreclosure Fraud Settlement Docs (II): Giving Homes to Charity as a Penalty

Foreclosure Fraud Settlement Docs (II): Giving Homes to Charity as a Penalty

Here’s the second installment in the review of the foreclosure fraud settlement documents. Exhibit D in this document lays out the menu for credits toward the settlement. When we talk about credits, the federal government and state AGs want you to assume that means a set amount of principal reductions that the banks will grant. But in reality, the banks can employ a variety of strategies to receive credit toward the settlement, including a number of routine actions they would probably undertake whether there was a settlement in place or not.

First, let’s look at the top line. Banks get a dollar-for-dollar credit on first-lien principal modifications on bank-owned loans when the borrower is under a 175% loan-to-value ratio. [E.g., you still owe $175,000 on a property whose current market value is only $100,000.] Any principal reduction on a portion of a loan over 175% is given half-credit. This stops the bank from getting credit on loans likely to default anyway. Banks can also get $0.40 credit on the dollar by forgiving forbearance on modifications they have already done. Forbearance occurs when a certain amount of principal is shifted to a balloon payment at the end of the loan. If the bank forgives that, they get partial credit, even though that doesn’t affect a monthly payment in the near term whatsoever.

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