The $25 Billion Mortgage Servicing Settlement : Does It Bring Closure?

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For weeks and months the press, the public, and the mortgage industry has followed the servicing settlement, focused on robo-signing issues. At long last the loan servicing abuses settlement has come, and the five big banks have reached an agreement with 49 states that clocks in at $25 billion.

But does it really mean anything for the average borrower, or mortgage company?

For the non-agency residential mortgage-backed security market, this is predicted to have a variety of effects. Analysts expect a slight increase in principal modification rates; short sales too are expected to increase on account of the $7 billion allotted to “other forms of relief” as part of the settlement. Such short sale activity could affect severities and delinquency timelines as well, especially for higher-balance loans.

There is potential for the bigger banks’ foreclosure filing rates to fall as the banks adjust to the new servicing standards as required by the settlement, though increased clarity and efficiency means that those rates should pick up again. Liquidation rates probably won’t pick up over the next couple of years, however, due to delays and a substantial backlog in the judicial court system.

As for housing, the principal reductions as outlined by the settlement will mean a lower shadow inventory of distressed properties, but, given the sheer number of distressed properties at present, chances are the settlement won’t hugely reduce property liquidations over the next 1-2 years.

These things are all good, but servicers are still subject to many types of lawsuits, and there are many attorneys out there who won't mind taking a shot at them. For the industry, clearing up some uncertainty is good, but no one is predicting an end to the troubles and legal fees.