A report from one of the three major ratings agencies analyzes the impact from a proposed settlement submitted by state attorneys general to the largest mortgage servicers.
The proposal was submitted by 50 attorneys general on March 7. The nation’s five biggest servicers received a copy.
The settlement calls for unified servicing standards and guidelines, according to the report, Residential Mortgage Servicing Standards: A Cost-Benefit Analysis, published by Standard & Poor’s Ratings Services. In addition, a monetary settlement would be used to establish a fund for aggrieved borrowers.
S&P speculates that the settlement would negatively impact the prospect of recovery for investors of residential mortgage-backed securities in the short term since the resolution of foreclosures would be drawn out further. S&P is concerned that the settlement could negatively affect investor confidence in the RMBS market.
In addition, mortgage servicers — who are already “inundated and operating under cost constraints” — would face even higher costs and workloads. The New York-based firm suggests that servicers — who are strongly resisting the proposal — will pass on the additional cost to borrowers through higher interest rates.
S&P said that the jury is still out on proposed principal forgiveness initiatives.
But the ratings agency does see some upside to the settlement.
“Over the long term, many aspects would likely benefit the residential mortgage servicing industry and the housing market,” S&P stated. “Specifically, the proposal would increase the transparency and ultimately the efficiency of residential mortgage servicing.”
The agency added, “One of the key questions asked in the report is whether the overall benefits of principal forgiveness outweigh the increase in losses that may result from longer foreclosure/resolution timelines.”
But S&P acknowledged that any final settlement could be a far cry from what has been initially presented.
