By
Mark Johnson, Ph.D., J.D.
The $26 billion mortgage settlement announced by the U.S. Government and state Attorneys Generals on Thursday, February 8, 2012 is causing some concern among pension investors and bond fund managers. The settlement "is cheap for the loan servicers while costly for bond investors including pension funds," according to Pacific Investment Management Co.'s ("PIMCO") Scott Simon as first reported by Bloomberg BusinessWeek.
Five leading U.S. banks are participating in the agreement, including Ally Financial Inc. (formerly GMAC), Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co. Together, the five banks service loan payments on approximately half of all home loans outstanding, or about 27 million mortgages, according to Inside Mortgage Finance. Other loan servicers are expected to join the program, thereby raising potential benefit levels.
Fannie Mae and Freddie Mac, which together guarantee about 50% of all mortgages in the U.S., are excluded from the settlement.
Of the $26 billion settlement, only $5 billion will be paid in cash by the banks to borrowers who lost their home due to foreclosure. The balance of benefits is calculated as follows:
The settlement will provide direct benefits to borrowers in excess of $20 billion, according to a government fact sheet, since servicers will receive only partial credit for every dollar spent. Some estimates project the economic impact may be equivalent to $32 billion.
Homeowners in Florida and California are expected to be major beneficiaries of this historic mortgage settlement, based on the volume of delinquent loans and a precipitous drop in home values.
Pensions Face Lower Returns on Mortgage Holdings
Pensions, 401(k) plans, and insurance companies are unwitting victims of this record-setting agreement, according to fund managers like PIMCO. Institutional investors lose out when the value of their mortgage-backed securities ("MBS") decline due to government-induced principal reductions, below-market financing, and forced assistance for the unemployed or military veterans.
Critics Question Projected Mortgage Settlement Benefits
Some critics say the mortgage settlement is too little, too late. While millions of people have lost their homes, for example, the settlement will only affect a relatively small number of them. There is also concern about "moral hazard," or the danger that more homeowners will default in order to get relief.
In Summary
As states and municipalities struggle to close an already existing $1 trillion gap in unfunded pension liabilities, a potential further reduction in the value of assets is troubling. Plan sponsors and fiduciaries will need to work closely with accountants and auditors to identify any adverse financial impact of the mortgage settlement, and determine off-setting measures to protect funding levels.
February, 2012
The $26 billion mortgage settlement announced by the U.S. Government and state Attorneys Generals on Thursday, February 8, 2012 is causing some concern among pension investors and bond fund managers. The settlement "is cheap for the loan servicers while costly for bond investors including pension funds," according to Pacific Investment Management Co.'s ("PIMCO") Scott Simon as first reported by Bloomberg BusinessWeek.
Five leading U.S. banks are participating in the agreement, including Ally Financial Inc. (formerly GMAC), Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co. Together, the five banks service loan payments on approximately half of all home loans outstanding, or about 27 million mortgages, according to Inside Mortgage Finance. Other loan servicers are expected to join the program, thereby raising potential benefit levels.
Fannie Mae and Freddie Mac, which together guarantee about 50% of all mortgages in the U.S., are excluded from the settlement.
Of the $26 billion settlement, only $5 billion will be paid in cash by the banks to borrowers who lost their home due to foreclosure. The balance of benefits is calculated as follows:
- Principal reduction. Underwater borrowers - meaning those who owe more on their mortgage than the loan is worth - will receive at least $10 billion in loan reductions if they are at risk of default.
- Refinancing. Homeowners who are current on their mortgages may be able to reduce their interest rate by refinancing under more lenient loan-to-value ratios. The value of the refinancing option is targeted at $3 billion
- Special relief programs. Up to $7 billion is targeted for unemployed borrowers, anti-blight programs, short sales, and service member assistance.
The settlement will provide direct benefits to borrowers in excess of $20 billion, according to a government fact sheet, since servicers will receive only partial credit for every dollar spent. Some estimates project the economic impact may be equivalent to $32 billion.
Homeowners in Florida and California are expected to be major beneficiaries of this historic mortgage settlement, based on the volume of delinquent loans and a precipitous drop in home values.
Pensions Face Lower Returns on Mortgage Holdings
Pensions, 401(k) plans, and insurance companies are unwitting victims of this record-setting agreement, according to fund managers like PIMCO. Institutional investors lose out when the value of their mortgage-backed securities ("MBS") decline due to government-induced principal reductions, below-market financing, and forced assistance for the unemployed or military veterans.
Critics Question Projected Mortgage Settlement Benefits
Some critics say the mortgage settlement is too little, too late. While millions of people have lost their homes, for example, the settlement will only affect a relatively small number of them. There is also concern about "moral hazard," or the danger that more homeowners will default in order to get relief.
In Summary
As states and municipalities struggle to close an already existing $1 trillion gap in unfunded pension liabilities, a potential further reduction in the value of assets is troubling. Plan sponsors and fiduciaries will need to work closely with accountants and auditors to identify any adverse financial impact of the mortgage settlement, and determine off-setting measures to protect funding levels.
February, 2012
Mark Johnson, Ph.D., J.D., a highly experienced ERISA expert, is founder of ERISA Benefits Consulting Inc. http://www.erisa-benefits.com
As a former ERISA Plan Managing Director and plan fiduciary for a
Fortune 500 company, Dr. Johnson has practical knowledge of plan
documents as well as an in-depth understanding of ERISA obligations. He
works as an expert consultant and witness on 401(k), ESOP and pension
fiduciary liability; retiree medical benefit coverage; third party
administrator disputes; individual benefit claims; pension benefits in
bankruptcy; long term disability benefits; and cash conversion balances.
He can be reached at 817-909-0778. ERISA Benefits Consulting, Inc by
Mark Johnson provides benefit consulting and advisory services and does
not engage in the practice of law.
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Recommended Reading
Insiders Tips For Reducing Spending
Money Saving Tips And Ideas Covers
Practically All Areas Of Household
And Modern Living Expenditure
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