More than a year after the nationwide probe into the improper and possibly illegal “robo-signing” of foreclosure affidavits, five of the nation’s top banks have entered a $25 billion settlement with state and federal officials to provide relief to nearly 2 million wronged homeowners.
The federal-state agreement requires servicers to implement comprehensive new mortgage loan standards and to commit $25 billion to resolve violations of state and federal law.
Because servicers will receive only partial credit for every dollar spent on some of the required activities, the settlement will provide about $20 billion in direct benefits to borrowers.
What remains unclear is how effectively the states and federal officials will work with the lenders – Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial – in fulfilling the terms of the settlement.
Mortgage servicers are required to fulfill these obligations within three years. There are incentives for relief provided within the first 12 months. Servicers must reach 75 percent of their targets within the first two years.
Banks that do not meet settlement targets and deadlines will be required to “pay substantial additional cash amounts.”
Here’s a breakdown on the compensation for homeowners:
- At least $10 billion will go toward reducing the principal on loans for borrowers who are currently either delinquent or at imminent risk of default, and owe more on their mortgages than their homes are worth.
- At least $3 billion will go toward refinancing loans for borrowers who are current on their mortgages, but who owe more on their mortgage than their homes are worth.
- Borrowers who meet basic criteria will be eligible for the refinancing, which will reduce interest rates for borrowers who are currently paying much higher rates or whose adjustable rate mortgages are due to soon rise to much higher rates.
- Up to $7 billion will go toward other forms of relief, including forbearance of principal for unemployed borrowers, anti-blight programs, short sales and transitional assistance, benefits for service members who are forced to sell their home at a loss as a result of a Permanent Change in Station order, and other programs.
The deal culminates in the largest campaign to assist “underwater” homeowners who owe more than the value of their homes. About 1 million borrowers who have not lost their homes will be granted principal write-downs and refinancing terms to take advantage of record low mortgage rates.
One estimate puts the compensation for each homeowner at $20,000.
About another 750,000 to 1 million homeowners who lost their homes to foreclosure from September 2008 to the end of 2011 will get checks for about $2,000. The money is to be distributed over three years.
The settlement “holds mortgage servicers accountable for abusive practices and requires them to commit more than $20 billion towards financial relief for consumers,” said U.S. Attorney General Eric Holder. “As a result, struggling homeowners throughout the country will benefit from reduced principals and refinancing of their loans. The agreement also requires substantial changes in how servicers do business, which will help to ensure the abuses of the past are not repeated.”
In addition to the $20 billion in financial relief for borrowers, the agreement requires the servicers to pay $5 billion in cash to the federal and state governments.
About $1.5 billion of this payment will be used to establish a Borrower Payment Fund to provide cash payments to borrowers whose homes were sold or taken in foreclosure between Jan. 1, 2008 and Dec. 31, 2011, and who meet other criteria.
An independent monitor, Joseph A. Smith Jr, will oversee compliance with the agreement. Smith has served as the North Carolina Commissioner of Banks since 2002. Smith is also the former Chairman of the Conference of State Banks Supervisors (CSBS).
For more information about the mortgage servicing settlement, go to www.NationalMortgageSettlement.com. To find your state attorney general’s website, go to www.NAAG.org and click on “The Attorneys General.”
The “robo-signing” scandal surfaced in the fall of 2010 after advocates and lawyers for homeowners accused lenders of submitting foreclosure documents without verification, or with false representation, or signing certain legal documents outside the presence of a notary public. Authorities say these practices may violate state laws and court rules.
The Federal Reserve estimates that 12 million mortgages are underwater, with aggregate negative equity of $700 billion, the central bank reported. Of these mortgages, about 8.6 million borrowers, representing roughly $425 billion in negative equity, are current on their payments.
The settlement talks among the 50 state attorneys general, federal officials and the banks have been contentious, with notable dissenters – include California and New York AGs – unsatisfied with relief for homeowners in their states and seeking limited immunity for the mortgage servicers from future legal actions. In recent days, both California and New York joined the settlement.
The states agreed not to pursue certain civil charges against the banks for the types of abuses covered by the settlement, but state and federal authorities can pursue criminal charges.
In addition, banks can still be prosecuted for their role in the nation’s financial crisis of 2007-2008. President Obama recently named New York Attorney General Eric Schneiderman to investigate how risky mortgage backed securities contributed to the collapse of the economy.