Posted on Friday, March 18, 2011
States' mortgage settlement proposal with banks
WASHINGTON, (Reuters) - The leading U.S. securities industry trade organization expressed strong reservations about a settlement proposal that state attorneys general have presented to five banks over allegations of widespread wrongdoing in servicing mortgages.
The draft proposal could lead to "unintended consequences" for the housing market and potentially harm investors in mortgage backed securities, the Securities Industry and Financial Markets Association said on Wednesday.
Randy Snook, a SIFMA executive vice president, said in a statement that it would put into effect new servicing standards for the mortgage industry without adequate advance evaluation.
In recent weeks the state attorneys general have circulated a 27-page proposal intended to be the basis of settlement talks with the five biggest U.S. loan servicers.
The institutions are Bank of America Corp (BAC.N), Wells Fargo (WFC.N), JPMorgan Chase (JPM.N), Citigroup (C.N) and Ally Financial.
The alleged wrongdoing includes producing fraudulent mortgage documents for use in court and failing to negotiate in good faith with homeowners over loan modifications.
Although the proposal did not contain a dollar figure, regulators and industry officials have said they expect the state regulators to ask for penalties of at least $20 billion from the five banks.
The proposal omits many details, but calls for an increase in loan modifications based on reductions in principal, the basic amounts owed by homeowners. It also calls for new rules of conduct for servicers when dealing with homeowners.
Snook said it would be "premature" for SIFMA to reject the proposal outright. But he said that it contains provisions that could harm both the housing market and mortgage investors because it would greatly extend the amount of time homeowners who modify their loans would have to pay off their mortgages.
The proposal "is unprecedented in its scope and prescriptiveness and requires a careful legal and market impact analysis, particularly for unintended consequences," Snook said.
The proposal already has been heavily criticized by consumer groups as well as by banks and some federal regulators. Legal aid lawyers and others who represent large numbers of homeowners in foreclosure proceedings have complained that it doesn't go far enough to punish the banks for alleged illegal activity, and doesn't provide adequate assurances of fair treatment of homeowners.
The banks have expressed concern about the possibility of having to jointly pay $20 billion or more, and the costs of making large numbers of loan modifications by reducing principal.
Tom Miller, the Iowa attorney general who has led the multistate inquiry, recently predicted that a settlement would be reached with the banks in about two months.
Federal regulators and industry officials have said, however, that a settlement may take longer, and that there may be separate settlements with individual banks rather than a single "global" settlement.
John Walsh, acting head of the Office of the Comptroller of the Currency, said on Tuesday that federal and state authorities are still trying to coordinate their actions and reach a global settlement, but said "whether this is possible remains to be seen." (Editing by Dave Zimmerman)