Wednesday, November 17, 2010

States, Mortgage Lenders in Talks over Fund for Borrowers in Foreclosure Mess

State attorneys general and the country's biggest lenders are negotiating to create a nationwide fund to compensate borrowers who can prove they lost their home in an improper foreclosure, the Washington Post reported today. Discussions are continuing over the size of the fund, who would administer it and what kind of proof homeowners would have to present to get access to the money. However, there is a consensus between the lenders and state officials that some sort of financial remedy is necessary to avoid the turmoil that could result from homeowner challenges. Any settlement between the banks and attorneys general almost certainly would force lenders to put more resources into modifying the loans of homeowners who missed their payments, rather than rushing toward foreclosures, state officials said. The banks could also be barred from foreclosing on homeowners while simultaneously negotiating mortgage modifications.

In related news, Senate Democrats, drawing on testimony from a leading foreclosure expert on foreclosure, yesterday charged that the nation?s biggest banks appeared to have big financial reasons for moving at a snail's pace to modify mortgages of homeowners facing foreclosure, CongressDaily reported today. Sen. Tim Johnson (D-S.D.) who is in line to chair the committee in the next Congress, said that he had "serious concerns" that banks have been unwilling to offer more generous concessions on the first loans of troubled borrowers because they were afraid of taking big losses on their massive portfolios of second mortgages. Prof. Adam Levitin of Georgetown University Law Center testified before the Senate Banking Committee that the four biggest banks had more than $400 billion in second liens - roughly equal to their collective market capitalization. The banks carry those second mortgages and home-equity loans on their own books, and would be forced to take immediate losses if they were modified. "If they start writing off their second lien mortgages, they would have no capital. They would be insolvent," Levitin said. "That creates a strong incentive not to recognize losses and just try to pretend it is not there," Levitin said. Bank of America and Chase executives staunchly disputed Levitin's allegations, saying that second liens play no role in their decisions to modify first mortgages.