WASHINGTON, D.C. – Following the agreement with the nation’s largest banks in response to last year’s robo-signing crisis, U.S. Sen. Sherrod Brown (D-OH) joined his colleague Sen. Bob Corker (R-TN) in urging the Administration to hold banks financially accountable for illegal practices and to protect the pensions of Ohio’s workers. The federal and multistate settlement would permit servicers to pay the proposed penalty by writing down the value of mortgage-backed securities (MBS) owned by investors – including Ohio pensions funds – without requiring servicers to reduce principal on the mortgages and second liens that they own. In a bipartisan letter to Secretary Shaun Donovan of the U.S. Department of Housing and Urban Development, Brown argued that Ohio’s pension funds, retirement systems, and universities, all heavily invested in MBS, should have a seat at the table during settlement talks.
“Wall Street banks must not be allowed to pass the buck to investors,” Brown said. “Wall Street banks simply should not take priority over teachers, first responders, law enforcement officials, and other pensioners and retirees. Middle-class Ohioans did not cause the foreclosure crisis, and this settlement should not be paid using their money.”
The agreement would require the largest mortgage servicers to commit to at least $10 billion to modify the terms of borrowers’ mortgages. Under the credit system, servicers will receive partial credit for writing down mortgages owned by investors and held in trust. Second liens on those mortgages will be written down in proportion to the modifications on the first liens.
It is estimated that the settlement will offer one million borrowers nationwide an average of $20,000 in principal reduction. According to a recent report, Ohio alone has 482,048 homeowners who are nearly $15 billion underwater. The average underwater Ohioan owes $31,000 more than their home is worth. According to CoreLogic, about 22 percent of all U.S. homes have negative equity totaling about $750 billion.
In advance of February’s agreement, Brown urged Administration officials and state attorneys general to hold banks financially accountable for illegal practices and to protect the pensions of Ohio’s workers. In a January letter to Associate Attorney General Thomas Perrelli, Consumer Financial Protection Bureau Director Richard Cordray, U.S. Department of Housing and Urban Development Secretary Shaun Donovan, and Iowa Attorney General Tom Miller, Brown said that mortgage servicers should be required to provide meaningful assistance to Ohio homeowners who lost their homes illegally, but not on the backs of other working Ohioans.
Brown has led the fight against wrongful foreclosures and unfair practices by Wall Street. Brown is the sponsor of the Foreclosure Fraud and Homeowner Abuse Prevention Act of 2011. This legislation would expand access to foreclosure prevention services, while increasing protections for homeowners and investors in mortgage-backed securities. Last July, in the wake of reports that banks and mortgage processors have continued forging signatures and submitting false affidavits, Brown wrote to federal regulators urging them to better protect consumers by publicly releasing information related to their settlements with 14 mortgage servicers in order to prevent further illegal practices.
Below is full text of the letter.
May 14, 2012
The Honorable Shaun Donovan
U.S. Department of Housing and Urban Development
451 7th Street S.W.
Washington, D.C. 20410
Dear Secretary Donovan:
We have repeatedly expressed concerns about the potential impact that the federal and multistate “robo-signing” settlement would have on private mortgage first lien investors. As you are aware, first liens are predominately held by pension funds and retirement funds – those funds charged with protecting the savings of hard-working Americans. Because any settlement could dramatically affect these funds, their managers should have a seat at the table when solutions are developed. Furthermore, the officials overseeing the settlement should use all means within their authority to accommodate their needs.
In several communications with us, you have indicated that the settlement will not violate the terms of the HAMP program, and that the HAMP program has a net present value (NPV) model which requires that any loan modification be advantageous to the end investor. This is a valid approach, provided that the NPV methodology is not flawed. To that end, we have three concerns.
First, why does the NPV model not take into account the second lien when solving for a target debt-to-income (DTI) ratio? As we understand the model’s mechanics, when solving for a DTI target, only the first lien’s obligations are included.
Second, why would any first lien be modified until such time as the second lien is completely extinguished? In our view, the waterfall should be: term on the second; rate on the second; and principal on the second. Once the second lien has been taken to zero, if a target DTI has not been reached, then and only then should the first lien be modified.
Third, will you disclose, by loan owner and lien, the percentage of investor loans in which the bank owned the second lien and the average principal reduction on such second liens? This would clear up a great deal of the speculation regarding the conflicts of interest inherent in a servicer servicing a mortgage on a property for which they hold a second.
We thank you for your service and your dedication to helping the housing market That said, we feel very strongly that private investors must not pay the price for the mistakes of others. Again, these investors represent the savings of hard-working Americans. Furthermore, if we expect private capital to return to a housing finance market that is currently dominated by government-backed mortgages, this is the capital that we will need to step-in.
Sherrod Brown Bob Corker