February 10, 2012
The federal government and 49 state attorneys general on Thursday announced what they called an “unprecedented” agreement that will see the five largest mortgage servicers in the country pay $25 billion or more to settle investigations into abusive foreclosure practices following the housing bust. “We have reached a landmark settlement with the nation’s largest banks that will speed relief to the hardest-hit homeowners, end some of the most abusive practices of the mortgage industry, and begin to turn the page on an era of recklessness that has left so much damage in its wake,” President Obama said in announcing the deal from the Eisenhower Executive Office Building.
At the same time, it’s clear that the deal will have a limited impact on the ongoing foreclosure crisis. “No compensation, no amount of money, no measure of justice is enough to make it right for a family who's had their piece of the American Dream wrongly taken from them,” Obama said. “And no action, no matter how meaningful, is going to, by itself, entirely heal the housing market. But this settlement is a start.”
Here, a guide to what the deal will and won’t do:
What’s this settlement about?
It came about as the result of an 18-month investigation by the state attorneys general and the Justice Department into abusive mortage-servicing practices, including the so-called robo-signing scandal, in which banks signed off on foreclosures without verifying that they were legitimate, or hired workers who used fake signatures or fake documents to speed houses through the foreclosure process. Other violations include what the government calls “deceptive practices in the offering of loan modifications”; the failure to offer options before foreclosure to borrowers with federally backed loans; and filing improper documentation in federal bankruptcy court.
Which banks are involved in the settlement?
Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and Ally Financial, formerly known as GMAC. Together, those five banks reportedly handle about 27 million mortgages, or 55 percent of all outstanding home loans. Nine smaller banks could join the settlement too.
How much are the banks paying?
The banks are paying an estimated $25 billion, but that total could grow to an estimated $32 billion if the nine smaller lenders join. Also, Bank of America will pay $1 billion to resolve a different federal investigation involving allegations that Countrywide Financial, which it acquired in 2008, defrauded the FHA by originating mortgage loans based on inflated appraisals. Half of that $1 billion will be paid upfront and the other half would be paid only if the bank fails to meet certain targets for loan forgiveness over a three-year period. In all, Bank of America says it could pay $11.8 billion.
Where will the settlement money go?
The biggest portion of the fund, about $10 billion, will come in the form of mortgage modifications to reduce the amounts owed by underwater homeowners – those who owe more on their mortgage that their houses are worth. Another $7 billion will go toward “other forms of relief.” Details for this portion of the plan are still sketchy, but the programs include forbearance of principal for unemployed borrowers, anti-blight programs, short sales and others. On top of that, at least $3 billion will go to refinancing underwater loans. Another $4.25 billion will be paid to the states, and $750 million in cash to the federal government. The Federal Housing Administration will get $1 billion.
What else is covered by this deal?
Besides imposing financial penalties, the agreement sets new mortgage-servicing standards and creates “dozens of new consumer protections,” according to the Justice Department, all meant to prevent abusive practices like robo-signing and to make sure homeowners don’t get pushed into foreclosure if they have other options. "The main impact of the settlement on the housing market will come from the new guidelines clarifying best practices for servicing delinquent loans," economists with Bank of America Merrill Lynch wrote in a note to clients.
Can homeowners who feel wronged by the banks still sue?
Yes. Homeowners can sue, and states can still pursue other lawsuits outside of the scope of the deal.
So will this deal actually help homeowners?
Yes, some. It’s estimated that about 1 million households will have their mortgage burden eased as part of this deal, and some 750,000 will get financial compensation. Even so, that’s only a fraction of the 11 million homeowners who are underwater. Of the $4.25 billion going to states, $1.5 billion will be distributed to an estimated 750,000 eligible homeowners who lost their homes between Jan. 1, 2008, and Dec. 31, 2011. That works out to an average of $2,000 per homeowners – or, as some have pointed out, barely enough to cover the moving costs of a family that has lost their house. And it will still take six to nine months for borrowers to find out if they are eligible for any benefits. The government says settlement administrators will send claim forms to those homeowners who are eligible to get cash as part of the deal – and it suggests that people who are afraid they will be hard to find contact their state attorney general’s office.
Who will get refinancing assistance?
To be eligible, borrowers must be current on their mortgage payments, have a loan greater than the value of their home and have a current interest rate higher than 5.25 percent. The refinanced loan must also reduce their monthly payments by at least $100.
And will the deal help the economy?
A bit. “Like many previous plans to stem foreclosures, this agreement will help at the edges,” writes economist Patrick Newport of IHS Global Insight. “The problem is too big for it to have a large impact, however.... Underwater homeowners are said to owe over $700 billion more than their homes are worth. The amount of the settlement” – with just $20 billion going to reduce mortgage debt and $1.5 billion in payments to homeowners – “will do little to reduce this.” The banks also have three years to fulfill their obligations under the deals, further diluting the economic impact of the deal. The deal will likely also restart foreclosure activity that had been put on hold since the robo-signing scandal came to light. In the short-term, that may mean more pain as the added supply of homes coming through the foreclosure pipeline puts further pressure on housing prices. In the long-term, though, clearing that overhang of distressed properties is a necessary step for the housing market to finally recover.
Which state didn’t sign on?
Oklahoma, which reached its own agreement with the lenders that will see them pay $18.6 million to the state. Oklahoma State Attorney General Scott Pruitt explained why he broke from the national group in a statement Thursday announcing Oklahoma’s agreement: “We had concerns that what started as an effort to correct specific practices harmful to consumers, morphed into an attempt by President Obama to establish an overarching regulatory scheme, which Congress had previously rejected, to fundamentally restructure the mortgage industry in the United States.”
This story was updated on Feb. 13.