Banks make $25 billion mortgage settlement
- Under the settlement, servicers will provide cash for foreclosure victims.
- Individual homeowners should receive on average $1,500 to $2,000.
- The biggest long-term effect may be new mortgage servicing rules.
Today, Attorney General Eric Holder and Secretary of Housing and Urban Development Shaun Donovan, along with most state attorneys general, announced a $25 billion legal settlement of investigations into improper foreclosures, mortgage modification misconduct and other abuses against U.S. homeowners by mortgage servicers. The lone holdout was the state of Oklahoma, which did not join the other 49 states included in the settlement.
In exchange for resolving those cases, the nation’s top five mortgage servicers — JP Morgan Chase, Bank of America, Citibank, Ally Financial and Wells Fargo, which service about two-thirds of U.S. residential mortgages — agreed to significant concessions.
Under the settlement, servicers will provide cash for victims, fund billions of dollars in mortgage write-downs for underwater homeowners and agree to new guidelines for mortgage servicing designed to prevent future abuses.
Restitution for victims
About 750,000 homeowners affected by bank misconduct will receive compensation from a $1.5 billion fund created by the deal. Individual homeowners should receive on average $1,500 to $2,000, says Ted Gayer, a senior fellow with the Brookings Institution.
While that may not seem like a lot for people who lost their homes because of bank misconduct, homeowners are still free to try and recover more through the court system. At a press conference today, Donovan stressed that the settlement wouldn’t affect individual cases brought by homeowners.
Eligible borrowers who were foreclosed on between Jan. 1, 2008, and Dec. 31, 2011, will be notified of their right to file a compensation claim.
Fund for principal write-downs
The settlement establishes a fund of $20 billion to help struggling homeowners, including $17 billion to reduce the mortgage balances of homeowners who currently owe more than their houses are worth. Iowa Attorney General Tom Miller, one of the architects of the settlement, says the fund may result in up to $35 billion in reduced principal because officials overseeing the fund will bargain with banks to pay less than full value to reduce mortgage debt owed by distressed homeowners.
Even so, if your mortgage is owned by Fannie Mae or Freddie Mac, you may be out of luck. The funds won’t cover homeowners with mortgages held by these entities.
“The big news here is principal reduction,” Gayer says. “But in the end, it’s not going to end up being that substantial.”
Gayer says the final total of underwater equity written down will probably be $17 billion to $30 billion, a fraction of the $200 billion in troubled underwater equity in the U.S.
Officials hope the required principal reductions will provide a framework and a push for future voluntary write-downs, but Gayer says that may be unrealistic.
“It seems like (officials) are almost counting on this triggering a change of behavior, which I’d be skeptical about,” Gayer says. “Banks could have always done principal reductions before, but they haven’t for a number of reasons.”
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