As reported in my February 9th Blog, the Federal and State Attorneys General entered into a Settlement of claims arising from the "robo-signer" scandals of 2010. Under the Settlement which has come to be called the "National Mortgage Settlement", five major lenders - Wells Fargo, BofA, Chase, Citibank, and GMAC/Ally - agreed to pay $25 Billion in cash and credits which would then be spent on relief for upside down property owners with a small amount, $2,000, going to property owners who actually lost their homes as a result of the scandal. What was unclear, was how would the lenders allocate their payment obligations. Wells Fargo has now given us a "road map" of what they intend to do. This may be used as a model for the rest of the lenders to follow, but not guaranteed.
The Wells Fargo Settlement obligation is $5.3 Billion. Their plan to meet this was contained in their 2011 Annual Report filed last week with the Securities and Exchange Commission (Pg 74 of the 233 page Report). What it does is identify three broad categories of payment:
1. $1 Billion for Foreclosure Assistance Payments - These funds will be paid directly to Federal and State government agencies to use as they see fit for their own foreclosure assistance programs, including reimbursement of monies that such agencies may have already paid out.
2. $3.4 Billion for Consumer Relief Programs - These funds are not actually "out-of-pocket" payments. Rather, Wells Fargo will receive "credits" against this obligation in exchange for principal reductions on existing loans. These will be made in two different categories:
(a) 1st Lien Principal Forgiveness - they will receive $1 of credit for each $1 of debt forgiveness on loans with a loan to value (LTV) ratio of 175% or less. This must be a minimum of 30% of their credits. If the LTV ratio is greater than 175%, they only get a 50% credit. This would suggest that they will offer credits to keep loans in place when the property is more "affordable". When it is not, ie: LTV over 175%, they probably will push these to foreclosure or short sale.
(b) 2nd Lien Principal Forgiveness - they will receive a sliding scale of credits based upon how delinquent the borrower is: Less than 90 days late = 90% credit; 91 to 179 days late = 50% credit; and 180+ days late = 10% credit. We can reasonably expect that the bulk of these credits will go to those who are in default but not seriously in default. Those who are not in default at all will presumably get no assistance.
3. $900 Million for Loan Refinancing - These funds will be used to assist debtors in refinancing their existing loans. There is a complex formula to follow that matches first the old interest rate against the new interest rate then multiplies that by a factor based upon the unpaid principal balance. So, each loan can bring a different result.
The bottom-line in the above is this: Wells Fargo has a new incentive to offer principal reductions on loan modifications and refinances. But these will most likely be used on loans where the credits will likely save the property from foreclosure. Conversely, those that do not fit within this framework may be more likely targeted for foreclosure which will push the urgency of short sale to minimize the risk of judgment, tax, credit, and career damage.
Meanwhile, if you or someone you know is struggling with an upside-down property and don't know what to do, than have them please contact us to discuss options. PLEASE CLICK HERE TO CONTACT US! Please make sure you provide a little description so we can contact you and address your needs.
The information presented in this Article is not to be taken as legal advice. Every person's situation is different. If you are upside-down on your loan, especially if your facing a lender lawsuit, get competent legal advice in your State immediately so that you can determine your best options.
