Merrill Lynch comments on AG settlement:
we do not view the settlement as a game-changer for the
housing market or the economy. In our view, the healing of the housing market
will continue to be slow and bumpy
Speeding up foreclosures
The AG settlement does three things, in our view. First, it resolves the outstanding
legal liability for servicer processing errors, otherwise known as “robo-signing.”
Second, it also allocates money to principal reduction. Third, it puts in place
guidelines for servicing delinquent loans. For example, it clarifies how a servicer
must communicate with a borrower before foreclosing.
In our home price model, created with Chris Flanagan MBS/ABS Strategist and
the securitized products research team, we assumed the settlement would be
reached early this year. This is a key reason we have expected foreclosure
speeds to pick up this year and next. In our baseline forecast, we assume 1.8
million distressed mortgages will be liquidated this year and 2.1 million next year.
This is up from 1.5 million in 2011 (Chart 1). This is the crucial factor for our
forecast for home prices to fall through this year before bottoming in early 2013 as
liquidations peak. We are on track with our forecast and look for prices to fall 7%
from 3Q11. We forecast the real recovery will start in 2014, and the bounce, when
it comes, could be strong.
The “transfer” to borrowers
A lot of the press reports have taken a very narrow view of the impact on GDP
from the agreement. They note that the total of about $40bn (assuming the
smaller bank agreement is also completed) could be as much as a 0.25%
stimulus to the economy. We disagree. It is important to recognize that the
payments are a transfer from banks to state governments and households.
Therefore we think it likely that bank profitability could be affected and that banks
would be encouraged to seek other sources of revenue, such as raising fees and
interest overall spending to the extent that the receivers of the transfer have a higher
“marginal propensity to consume (MPC)” the monies than the payers. In our view,
the net effect of this transfer will be a stimulus to GDP of less than 0.1% spread
over three years.
Neither a lender nor a borrower be
It is also important to recognize that credit to the household sector will likely
remain tight for the foreseeable future. The AG settlement only helps reduce one
kind of risk for banks. Lending to the household sector has become risky for
banks. If a loan goes bad, the bank could face considerable legal and reputational
risk. As a result, lending standards for mortgage loans have remained
exceptionally tight
Mortgage lending is particularly risky. In some states it now takes more than three
years to repossess the loan and during that period many homeowners do not pay
their mortgage. This “squatters rent” amounts to a transfer payment from the
mortgage holders to the delinquent homeowner of about $50bn per year. The
harder and more expensive it is to repossess homes, the less willing lenders will
likely be to extend credit. Confidence in the home as collateral has been reduced,
in our view.
