Why you may be paying for someone else’s mortgage relief

They'll rent it back to you. (Rick Wilking / Reuters)
They'll rent it back to you. (Rick Wilking / Reuters)

In recent years, banks have agreed to spend billions of dollars to help struggling homeowners as part of settlements with the government related to the lenders' alleged misconduct during the housing crisis.

If all works as planned, the relief should end up helping many people who are struggling to keep up with their mortgage payments. But it may not work out as well for investors who purchased the mortgages that these homeowners took out.

Who are the investors? They include unions, pension funds, 401K savings plans and mutual fund shareholders, not just Wall Street firms,  according to the Association of Mortgage Investors. In other words, they're the general public, as AMI likes to put it.

And recent multibillion-dollar government settlements with JPMorgan Chase, Citigroup and others hurts those investors, the group says.

The settlements call on the banks to grant various forms of relief, such as modifying the mortgages of "underwater" borrowers by reducing the size of their loans. (These are borrowers who owe more on their mortgages than their homes are worth.) When that type of debt forgiveness takes place, whoever owns the loan takes a hit because they don’t get paid as much as was promised. In some cases, the banks own the loans. But in others, the banks have bundled the loans into securities and sold them to investors, which means the investors (and the firms that manage their money) get burned when a loan is modified. That’s why AMI is calling foul.

“If they want to settle and help consumers who need help, terrific,” said Vincent Fiorillo, president of AMI's board and global sales director at Doubleline Capital. “If you want to take the investors’ money to settle, that’s where I have a problem. The investors are not the bad actors here.”

In its record $13 billion settlement with the government last year, JPMorgan agreed to grant $4 billion in consumer relief.  On Tuesday, the monitor who tracks the distribution of that relief money reviewed a small sample of the bank's loans (100 of them) to make sure the bank is correctly recording the aid, and it is.  But the review also shows that 44 percent of those loans are owned by investors, not the bank.

More than two years ago, when the government and 49 U.S. attorneys general negotiated a $25 billion settlement with some of the nation’s largest banks, investors paid almost a quarter of the $20 billion that was set aside for relief, said Laurie Goodman, director of the Urban Institute’s Housing Finance Policy Center.

The deal was set up to encourage banks to modify their own loans.  For instance, every dollar of debt that the bank forgave on its own loans would be applied to the $20 billion total.  But for every dollar of debt forgiven on an investor-owned loan, the bank was credited only about 50 cents.  Even so,  investor-owned loans made up 39 percent of relief credited to Bank of America and 29 percent of relief credited to JPMorgan under that deal, Goodman said.

When the government and state authorities last year ordered Ocwen Financial to provide $2 billion of relief for underwater borrowers, investors carried the vast majority of that cost burden, Goodman said. Ocwen only services loans, meaning it collects borrowers’ payments. It does not own loans.

“The investors have a huge point,” Goodman said. “The banks are basically spending their money.”

In some of these deals, like the $7 billion Citigroup settlement last week, banks are not allowed to forgive mortgage debt on investor-owned loans without the investors' permission. But investors say that the trustees charged with granting permission work for the banks, not the investors, underscoring an inherent conflict of interest regarding the trustees’ role.

The Justice Department, which negotiated many of these settlements, did not return calls seeking comment. It also has not responded to two letters AMI sent to U.S. Attorney General Eric Holder, including one sent last month, said Chris Katopis, the group's executive director.

"We ask that we be included in any negotiations from this point forward to make sure our economic interests are protected and not sacrificed by the parties the government has charged," Katopis wrote in the most recent letter.

David H. Stevens, head of the Mortgage Bankers Association, said that investing comes with risks, and just about anyone with a financial stake in the housing sector got hit with unprecedented risks once the housing market tanked and the government rushed to its rescue. No one escaped unscathed, he said.

“Investors can be screaming from the corners that they’ve been harmed, but it’s tough to say the government can touch everybody else’s mortgages but not mine,” Stevens said.

On the other hand, the government is playing an outsize role in supporting the mortgage market right now. Policy makers are struggling to scale back the government’s footprint and lure the private sector back. And these types of settlements are likely to discourage their return, he said.

“If you’ve broken the trust, how do you get them back?” Stevens said.

Dina ElBoghdady covers housing policy for The Washington Post.
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