The financial markets learned Monday that 10 mortgage servicers and federal regulators agreed to end independent foreclosure reviews conducted on behalf of borrowers harmed by foreclosures and instead pay a hefty $8.5 billion settlement to put issues like robo-signing behind them.
You could call it a big game of pick-up sticks that got to out of hand, or perhaps a case of too many cooks in the kitchen during the foreclosure reviews.
Whatever analogy you want to use, it doesn't really matter at this point. Either way, the end of the government's mandated foreclosure reviews for 10 of the 14 impacted mortgage servicers is over with the new deal cut. The remaining four servicers are said to be working on a possible deal of their own with regulators.
Of course, with the state attorneys generals entering an even larger deal last year, some industry professionals suggest we may be inching closer to locking up the issue of robo-signing and throwing away the key on foreclosure-document handling issues that have plagued mortgage servicing.
Rick Sharga, an executive vice president with Carrington Mortgage Holdings, said, "It seems likely that the settlement announced today will signal the end of broad-based, national initiatives intended to penalize lenders for mistakes and alleged malfeasance that took place during the housing market boom."
He added, "This agreement, combined with last year's settlement between 49 state attorneys general and the five largest mortgage servicers, will result in the industry ultimately paying out between $35-40 billion in principal balance reductions and fines, and facing a much more tightly regulated lending environment."
In some instances, analysts say the independent review process was expensive and not timely, making it easier for servicers to just cut a big check for homeowners and move on.
But reactions are decidedly mixed on the issue.
Roy Oppenheim, the owner of a Florida law firm that deals in foreclosure defense, sees the settlement as an initiative that may be good for the economy, but he's worried about what it says for jurisprudence in the U.S.
In other words, what does it mean for the legal system in the future when a damage award is distributed with no real guidelines and the 'alleged error' that led to the award is not found through any type of official proceeding. He also raises questions about how the settlement funds will be divided among impacted homeowners. Can the funds be apportioned according to harm if there is no investigation?
"From a jurisprudence view point, we are creating a moral hazard," he said. "We have this huge overarching moral hazard right now because there will never be a full accounting and there will be no personal responsibility."
Manal Mehta with Sunesis Capital has been following the issue from an investor's perspective.
"All of this comes down to two words which until now have been the fundamental bedrock of American justice: Due Process," said Mehta. "The foreclosure reviews were designed to give American citizens the due process that they are entitled to under the law. Substituting a paltry monetary settlement without addressing the fundamental issue of due process is a mockery of our justice system."
While noting the issue may be somewhat behind us, Sharga is not suggesting robo-signing and document issues are a thing of the past.
"Since smaller lenders and servicers didn't process loans at volumes that would have made robo-signing likely, this most recent settlement may in fact finally put that issue to rest," he said. "It's less-than-certain, however, that we won't see future litigation from individual state attorneys general - or even borrowers - on related issues, unless this agreement has some safe harbor provisions included."
The key takeaway is the industry can only do one thing: Stay alert even though this might not be over.