Wells Fargo flouting mortgage relief settlement?

UPDATE: Wells Fargo is being sued by the Attorney General of New York for failing to comply with the terms of the National Mortgage Settlement. As a result, the bank is under renewed pressure to modify home loans. So if you’re encountered roadblocks at every turn, now may be the time to try again.

A new settlement in 49 states could bring mortgage relief to an estimated 1 million homeowners.

The $26 billion foreclosure settlement will impact customers of Bank of America, GMAC, Citibank, Chase and Wells Fargo in all states except Oklahoma.

At the crux of the settlement is that lenders will be free, if they wish, to write down the value of residential mortgage loans on their books in one of three ways.

Before I get into the ways, let me say that this deal automatically creates an issue of moral hazard. One person has loan they’re paying on as agreed and they see somebody else get a big portion written off like a gift. How do you square that?

Here’s how: In residential lending, it’s taken as an article of faith that you pay what you owe. Yet in commercial lending, lenders routinely agree to reduce the balance on loans, generally in exchange for a share of ownership. That’s called a “workout.”

Workouts are just a part of the way it plays out in commercial real estate. Now, we’ll essentially have workouts (aka write downs) in residential real estate thanks to this new deal.

Having said that, here’s what we know so far about how things are going to shape up:

• The greatest share of money will go to writing down balances of mortgages. For a lender, a foreclosure costs a lot more money than a balance write down, so that’s their motivation. Again though, this is a rotten deal for most people who pay as agreed and nobody helps you.
• A smaller share of money will go to the banks to make them allow you to refinance even if you are upside down in your loan.
• The smallest portion of money will go to homeowners who were foreclosed on in the robo-signing scandal. Such homeowners will be eligible for a cash payment of somewhere between $1,500-$1,800.

This settlement was just announced and it will take two months just to appoint an overseer of the program. After that, I expect it to take the rest of 2012 before homeowners start getting unilateral settlement offers from the banks in the mail.

You hear me giving timelines, which are automatically suspect. But the banks are being offered special credit to get deals done in less than 12 months from today. Visit NationalMortgageSettlement.com if you want to read a simple summary of what is known at this early stage.