In reply to foxtrapper:
In fact, I don't think this program goes far enough because there is a lot more to this than meets the eye, but that's not necessarily been reported all that broadly in the mainstream media.
One of the problems that this program is trying to resolve is that there is a massive imbalance in incentives between certain servicing operations (like the ones BoA owns, but there are other large banks that are part of this agreement, too) and the investors that are holding the loans. The servicers weren't only screwing homeowners (there is plenty of documented servicer misconduct out there, like intentionally applying payments late even though payments arrived on time so they could charge late fees, not working with distressed borrowers because the servicer profits from foreclosure, etc etc), but they also screwed investors who are holding the mortgage backed securities.
It's a well documented fact that working with viable borrowers for loan modifications - which tends to happen all the time in business-to-business lending - will minimize the losses for investors overall compared to grabbing the collateral, especially when the party grabbing the collateral isn't the investor and said party can deduct all their fees etc before handing over what's left. The incentive structure for servicers however makes it much more profitable for them to foreclose than to work with viable borrowers. The fact that the loan recovery rate on a mod is usually around 70%-ish, whereas the recovery rate on a foreclosure after all the fees and crap is way less than 50% should concern you somewhat. BTW, those investors that hold mortgage backed securities shouldn't concern you, right? That's just some big shot Wall Street dude who's not going to notice the loss anyway, right?
Actually, there is a very good chance that you are that big shot Wall Street dude via your pension or 401(k). Pension funds and 401(k) mutual funds hold a ton of MBSs as they were deemed safe investments that paid a reasonable rate of return.
Just to give you a couple of pointers regarding the misconduct of the banks that is supposedly covered by this agreement:
- Intentionally steering borrowers (usually minorities) into subprime loans with higher fees and interest rates when they would have easily qualified for prime loans instead.
- Adding illegal fees to borrowers accounts, applying payments to fees first when it should have been applied to the mortgage principal and interest first as per servicing agreement and more cutesy stuff like that
- Fabricating[1] documents that allowed them to foreclose on a property if they had the legal standing or not, because the note transfers got messed up big time and making up E36 M3 was cheaper than fixing the mess. This part is usually called robosigning, but there is more to it that people perjuring themselves by signing an affidavit that states that they have personal knowledge of a case when they didn't.
There is also a lot more under the surface of this whole thing, like:
- A bunch of violations of New York trust law when it came to transferring the borrowers' notes into the MBS trusts. There is a bunch of documented instances where the originator kinda sorta forgot to do that and kept the note. They have to be transferred within a certain timeframe for the whole transfer to be valid, this hasn't happened and now they're making up documents that show the transfer that didn't take place. So those Mortgage Backed Securities that you have in your pension are probably Not Mortgage Backed Securities.
- The whole MERS registry that the banks built mainly to avoid county recording fees when the mortgage/note changes hands. From all you hear that's a big mess and there are doubts over its accuracy and auditability, but IIRC it hasn't been possible to verify these independently. And those recording fees that might have paid for a teacher or two in your county? Well, they never made it.
There is also the argument that reducing the number of foreclosures will stabilise prices in markets that are at best lukewarm which should benefit those homeowners that didn't "win" the principal reduction "lottery".
There is a lot more to this overall than meets the eye, and a lot of it isn't visible until you actually start looking into the matter further than the reporting in the local and mainstream media.
Also, before you blame everything on deadbeat borrowers and people buying iPads when they should have paid the mortgage and their six credit cards, I would recommend reading the book "The two income trap". That was written before the whole housing bubble got really frothy, but you can already see the makings of these problems being described in there.
[1] It's called "fabricating" if a bank does it and "forging" when Joe Schmoe does it, IIRC. There is a ton of documented instances of documents appearing in court out of thin air.