NSM Deal Exhibits Good Progress

The progress report released under the National Mortgage Servicing (NSM) settlement shows continued progress being made by the five largest mortgage servicers – Bank of America Corporation ( BAC - Analyst Report ) , Citigroup, Inc. ( C - Analyst Report ) , JPMorgan Chase & Co. ( JPM - Analyst Report ) , Wells Fargo & Company ( WFC - Analyst Report ) and Ally Financial Inc. According to the report, the servicers provided $26.11 billion in relief during the period from March 1 to September 30. This has served an average of $84,385 to about 309,385 borrowers.

Out of the total $26.11 billion, the maximum relief – $13.11 billion – was provided via short sale (vending of homes by owners for a value lesser than the mortgage amount). Here, BofA led the way with $7.4 billion of short sales, followed by JPMorgan with about $4 billion.

Further, the first lien modification was completed for 21,833 borrowers, receiving $2.55 billion in loan principal reduction, averaging at about $116,929 per borrower. In addition, second lien modifications and extinguishments were given to 50,025 borrowers, representing nearly $2.78 billion in relief. Apart from these, the lenders had completed loan reductions of approximately $1 billion before March 1.

Hence, a total of $6.33 billion worth of principal reductions (both first and second lien) was done by the mortgage servicers. BofA provided $3.65 billion; JPMorgan $1.3 billion; Wells Fargo $608.8 million; Citigroup $551.3 million and Ally $195.1 million.

Moreover, as of September 30, 2012, another 30,967 borrowers were in active first lien trial modifications with the aggregate principal value of $4.19 billion. If the trials are successful, this would represent average potential relief of $135,223. The servicers also provided another $1.4 billion in relief via refinancing 37,396 home loans with an average principal balance of $210,398.

Hence, taking into consideration the various types of relief extended (excludes relief in process) by the banks, BofA tops the list with $11.8 billion in aid, followed by JPMorgan with $6 billion, Wells Fargo with $2.5 billion, Citigroup with $1.1 billion and Ally Financial with $587.8 million. Though the amount totals approximately $22 billion, the mortgage servicers have not yet achieved their goals as settlement provides limited credit for a certain category of assistance.

The servicers do not get full credit for every dollar of relief they provide. Under the NSM settlement signed early this year, the five servicers will have to furnish roughly $20 billion in relief to homeowners on the verge of eviction over a period of three years. Moreover, they will be required to lower loan balances for struggling borrowers and refinance the loans for customers whose homes are worth less than the value of their mortgages.

Though the settlement deal came as a big relief for the banks, they are required to meet the targeted commitments or pay fines instead. If banks are not able to meet the targeted modification commitments over a period of three years, they could face penalties of 125–140% of the deficit. These banks are required to complete 75% of the commitments by the end of 2014 and the remaining in the next 12 months.

However, the NSM deal only covers a tiny proportion of underwater mortgages (nearly 11 million homes) as it is expected to provide aid to only 1 million of these. Yet, we believe that the housing sector is going to benefit from the NSM settlement as low unemployment rates are likely to aid homeowners to shun foreclosures in the near term. Also, the servicers will be benefited as they will be able to improve their balance sheet.