The state’s banking industry is keeping a close eye on the way the $25 billion federal settlement between the U.S. Department of Justice and the five largest banks in the country is handled in theory and practice.
In theory, the banks – Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally – are being punished for the shoddy and underhanded practices that precipitated the collapse of the housing market. In practice, the banks are required to follow a strict new set of mortgage servicing guidelines under threat of further financial penalty, according to the consent agreements released as part of the settlement by the justice department last week.
For example, banks are required to review, quarterly, how well they follow the new rules. They’ll do this by randomly sampling mortgages they’ve written, to an independent monitoring and enforcement office paid for under the terms of the settlement. Joseph A. Smith Jr., former North Carolina banking commissioner, will lead that office, which is being established currently.
To avoid fines, the banks must hold errors to below 5 percent. Depending on the case, servicers could be fined up to $1 million for each violation of federal banking law.
The banks will have to use the settlement’s method of monitoring loan servicing for any home loans they write and service, and any home loans they sell into the secondary market, with an exception. If these banks sell loans to the so-called public secondary market – Fannie Mae, Freddie Mac, etc. – they will be exempted from the monitoring requirement.
Uncertain Future
But the future is uncertain for Fannie and Freddie. Federal Home Loan Bank of Boston President Edward Hjerpe has said publicly that until the U.S. Congress decides what to do with the two servicers, which it took over amid the collapse, the housing market will be operating at half speed.
Does making Fannie and Freddie a safe bet for the big five’s servicing needs create further confusion? Will that uncertainty and confusion play into how successful or unsuccessful banks are in complying with the settlement, or how successful or unsuccessful the government is in enforcing it?
“Absolutely,” said Kevin Handly, a banking attorney with Pierce Atwood LLP in Boston. “The continuing failure to resolve Fannie and Freddie creates a huge cloud of uncertainty over the future of the residential mortgage industry.”
Some suspect the secondary market will one day be entirely private.
Attorney General Martha Coakley has advocated that position, and Brad Puffer, a Coakley spokesman, told Banker & Tradesman that Coakley’s attention is firmly on a Fannie and Freddie principal write-down. Whether the rules put in place for the five banks in the settlement could bleed over into the rest of the banking sector is not a concern she is ready to address, Puffer said.
In the short term, it doesn’t appear as if the monitoring system being set up by the federal government for the big five banks will rub off on smaller regional or local banks, said Jon Skarin, executive vice president of the Massachusetts Bankers Association.
Down the road, there could be new servicing standards introduced by the new Consumer Financial Protection Bureau for smaller banks, but “they would’ve done that anyway,” Skarin told Banker & Tradesman.
“There’s somewhat of a likelihood that some standards could get pushed down to the next group of servicers, the next largest 15, and that includes banks and companies that are just servicers. In the short term, that’s where they will probably stop,” Skarin said.
Should Fannie and Freddie go completely private, it could open the door for the standards being imposed on the five banks in the settlement to be imposed on all banks.
“Two or three years from now, when maybe they do something with Fannie and Freddie, wind them down, then maybe there will be problems,” Skarin said, “but at that point, anything is on the table anyway. When we move to a more private market, then maybe it’s something we need to look at.”
