Mortgage foreclosure settlement
In a historic deal after repeated delays and over a year of negotiations, the Justice Department, U.S. Department of Housing and Urban Development, and 49 state attorneys general has finalized a $26 billion civil settlement with five of the largest mortgage lenders for wrongful foreclosures through robo-signing wherein homes were foreclosed upon without human review or proper paperwork. Participating banks include Bank of America, Wells Fargo, JPMorgan Chase, Citigroup Financial and Ally Financial.
Several states were hesitant to sign on as there was a lack of clarity as to how the settlement would shake out and if each state was getting their proportionately fair share, and until New York, Nevada and California finally signed on today, the settlement looked to be much smaller than the final $26 billion. Oklahoma was the lone state that declared the settlement to be insufficient and refused to sign on – it is possible that they will continue pursuing a separate civil lawsuit against the banks to best serve wrongful foreclosure victims in their state.
“We are using this opportunity to fix a broken system,” said U.S. Attorney General Eric Holder at a news conference this morning. Most of the settlement will go to underwater homeowners for the next three years, with a strong emphasis and better incentives for relief in 2012.
Breakdown of settlement funds
The largest portion will go toward reducing the principal on underwater or delinquent mortgages, ranging from $17 billion $34 billion. Officials note this portion will help up to one million current homeowners which at the $17 billion pace could mean an average principal reduction of $17,000. Most note, however, that the majority of underwater homeowners would still not be able to afford payments, even with a $17,000 reduction, so the one million mark, like other recent programs, may come up short.
Various programs are in place to help homeowners to obtain permanent mortgage modifications at lower rates, but this settlement adds up to $3 billion more relief, offering lower rates to current homeowners without principal reductions. As rates are currently at historic lows, this could provide mortgage savings nationwide.
The only relief to wronged homeowners comes in the form of $1.5 billion set aside for homeowners whose homes were wrongly foreclosed upon between 2008 and 2011, offering up to $2,000 per homeowner. Given the intention of the settlement being to make things right after illegal foreclosures, the amount set aside for people who were wronged appears to be disproportionate and was a massive point of contention for select states’ attorneys general, but it appears the needs of the few were sacrificed for the many.
A total of $5 billion will be paid to states, some of which will be offered to foreclosure victims, most of which will likely go to currently underwater borrowers to keep them in their homes.
According to CoreLogic, 11 million underwater mortgages and 1.5 million borrowers who are at least 90 days late on their mortgage payments. The settlement funds seek to slow the hemorrhaging of foreclosures.
Next up – criminal charges
President Obama recently set up a new task unit to pursue criminal charges for mortgage crimes and while the $26 billion settlement closes civil settlements for wrongful foreclosures with these five banks, the settlement does not stop investigations into fraudulent mortgage-backed securities practices.
This historic settlement is the second largest in history, second only to the tobacco industry, and the settlement targeting the five largest servicers has paved the way for the next round of targets of several other banks.