09 February 2012

$26 Billion Mortgage Settlement Is Being Called Historic

First appeared in USA Today
Five major mortgage servicers agreed to a $26 billion settlement with state and federal officials in a deal that is being called historic, but which critics are likely to say doesn't go far enough.

The deal could grow to $30 billion if nine more servicers sign on, and it's expected to cover almost all 50 states, a White House official said Thursday.

The settlement would be the biggest involving a single industry since a 1998 multistate tobacco deal.
A monitor will be appointed to see that it is carried out.

The five servicers involved so far —Bank of America, JP Morgan Chase, Citigroup, Ally Financial and Wells Fargo— will provide $17 billion in mortgage relief to more than 1 million homeowners. Another $1 billion will go to the federal government; $3 billion will help the servicers refinance borrowers into lower-interest rate loans.

Hundreds of thousands of borrowers are also expected to receive restitution, averaging $1500 to $2000, if they lost homes to foreclosure from 2008 to the end of 2011.

The relief must be extended within three years or servicers would have to pay any remaining part of the settlement in cash. To encourage servicers to do more work sooner rather than later, given the ongoing foreclosure crisis, they'll get more credit for modifying and refinancing loans in the first year of the deal.

The settlement, which has been a year in the making, will create the largest effort by servicers so far to write down the amount homeowners owe on underwater mortgages, where the homeowners owe more than the house is now worth. Falling property values have put many homeowners under water. Home Insurance in New York City may be able to help.

The reductions in loan principal are expected to account for at least 60% of the $17 billion pot. By writing down principal, officials hope fewer people will eventually default on their loans.

Most of the writedowns are expected to occur on loans that the five servicers own themselves, and will not include any loans owned by mortgage giants Freddie Mac, Fannie Mae or the Federal Housing Administration.

The impact of the principal reduction is expected to go farther than the actual dollars. Servicers will get "credits" for writing down loans at varying stages of being under water. They'll get more credit for some writedowns than for others, officials said.

All told, the $26 billion deal could provide up to $40 billion in mortgage relief, one official estimated.
If so, California officials said in a statement that state would get $18 billion of that, including $12 billion in principal reductions and other relief for an estimated 250,000 homeowners.

"This is an historic amount of relief for California homeowners, but it is one piece of a broader focus. We will continue our crackdown on mortgage fraud and quickly move to pass legislation that will simplify, reform and upgrade our broken mortgage system," California Attorney General Kamala Harris said.

In most cases, to be eligible for principal write downs, borrowers would need to be delinquent on their mortgages. While the principal writedowns, when averaged, might run just $20,000 or so on a national basis, writedowns could be much larger in some cases, officials say.

The servicers will be expected to devise a plan on how to reach out to borrowers to carry out the mortgage relief.

The settlement is expected to include most states; New York and California were prominent last-minute holdouts. A Brooklyn Homeowners Insurance company waits to hear.

In exchange for the settlement, the servicers will get some relief from future legal claims.

But disgruntled borrowers could still sue individually or as part of a class action. The settlement also does not prevent future or ongoing lawsuits in the arena of securitization, in which loans were packaged and sold to investors. Nor would it prevent any criminal investigations.

The nationwide settlement stems from abuses that occurred after the housing bubble burst. Many companies that process foreclosures failed to verify documents. Some employees signed papers they hadn't read or used fake signatures to speed foreclosures — an action known as robo-signing.

Along with financial costs, the settlement is expected to create what supporters say are the strictest standards to date for how mortgage servicers should treat distressed home loan borrowers in the future.
Support for the settlement by so many states increases chances that it'll be viewed as a win for the state attorneys general.

It also arms the Obama administration with more ammunition for its claims that it's addressing the foreclosure crisis.

But the settlement falls far short of fixing all that went wrong in the U.S. mortgage industry, after risky loans were extended to millions who couldn't afford the loans. That helped lead to a collapse in U.S. home prices, which are down an average of 33% nationwide since 2006.

The settlement will not compensate the vast majority of U.S. homeowners who have kept making payments while their home values plunged.

Instead, much of the settlement will help homeowners who are on the brink of foreclosure — but have continued to make payments — with principal reductions.

If the principal reductions help prevent foreclosures, that will mean fewer distressed homes for sale, which could help overall home prices.

But U.S borrowers collectively owe $700 billion more on their homes than their homes are worth. The principal forgiveness is "not going to be enough to generate a significant and sustained housing market recovery," says Capital Economics economist Paul Diggle.

For weeks, attention has largely focused on how much the servicers would end up paying in the settlement, and what states would sign on.

But state and federal officials say new servicing standards, which affect how companies interact with distressed borrowers, are equally important.

"There's no doubt that they are an improvement," says Ira Rheingold, executive director of the National Association of Consumer Advocates.

The new standards are expected to restrict one practice that has long been criticized, dubbed "dual track." That's where servicers proceed with foreclosures even if someone is pursuing a loan modification. Not even the best Queens Homeowners Insurance can fix everything.

The agreement won't ban that completely, but it would prevent servicers from completing a foreclosure sale of a home if a modification is being considered.

Servicers will also be required to provide borrowers with a single point of contact, something other new standards also require. Most large servicers already have that or are implementing it, companies say.
In addition, the settlement monitor will periodically test that foreclosure affidavits are executed properly.

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