Posted on Thu, Feb. 09, 2012
last updated: February 09, 2012 08:39:27 PM
WASHINGTON — State and federal regulators announced on Thursday a settlement worth at least $25 billion with Bank of America and four other large banks, ending several years of litigation over alleged foreclosure abuses. The deal offers some help to struggling homeowners, but experts view it more as a moral victory with limited impact on the broader housing market.
The announcement capped months of intense negotiations that involved federal regulators, state attorneys general, consumer advocacy groups and big players on Wall Street and in finance. It was the largest government-industry settlement involving states since the $200 billion-plus tobacco industry settlement in 1998.
The settlement effectively punishes the banks for alleged abuses in the foreclosure process, including robo-signing, which involves providing fraudulent documents in court proceedings when trying to take back properties from homeowners who are delinquent on their mortgages.
"Under the terms of this settlement, America's biggest banks, banks that were rescued by taxpayer dollars, will be required to right these wrongs. And that means more than just paying a fee," President Barack Obama said in a statement Thursday before the cameras.
The banks are required to dedicate $20 billion in relief to homeowners, including $10 billion toward reducing principal for struggling borrowers. The banks also must provide $5 billion in cash to federal and state governments to assist their foreclosure relief programs.
About 1 million households at risk of foreclosure should be able to reduce their loans. Another 750,000 Americans who lost their homes to foreclosures will receive about $2,000 each. The banks have three years to distribute the assistance, and the deal will be monitored for compliance.
The five banks that agreed to settle federal and state probes are Bank of America, which is on the hook for the biggest payout, as well as JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial Inc. That's the Detroit-based bank-holding company that's affiliated with Chrysler and General Motors and still partially owned by U.S. taxpayers.
Not everyone will qualify for help with his or her mortgage. The settlement money will be used on a state-by-state basis to help wipe out some of the principal on mortgages that aren't owned or backed by Freddie Mac or Fannie Mae — together about 55 percent of all outstanding mortgages. These mortgages must be of values greater than the current market prices of the homes.
Late in the day, the Justice Department announced an additional agreement in which Wells Fargo, Citigroup and Ally will be required to provide any service member who was the victim of a wrongful foreclosure with a minimum payment of $116,785 plus the service member's lost equity and interest. Service members also will receive compensation for any additional harm suffered.
Consumer advocacy groups applauded the settlement.
"Despite its limitations, the settlement requires real reforms in the mortgage servicing industry to stop sloppy business practices and out-and-out fraud. It also will help stabilize housing markets and property values by giving more homeowners a chance to restructure or refinance out of unaffordable loans that are underwater," Michael Calhoun, the head of the Durham, N.C.-based Center for Responsible Lending, said in a statement.
Apart from the settlement money, the deal requires the first-ever standardization of practices for mortgage servicers. Often owned by big Wall Street banks, they collect mortgage payments on behalf of investors who own pools of mortgages that have been packaged together into complex bonds.
"It is a pretty major step to ensuring that servicers will be standardized and have much more consumer-friendly processes ... and that's a big step forward," said Barry Zigas, the director of housing policy for the Consumer Federation of America.
As the foreclosure crisis grew exponentially, the lack of a single point of contact often frustrated homeowners who were trying to stay in their homes.
Servicers often lost documentation, changed the rules of the game in the middle of the process and denied homeowners loan modifications without any explanation of why they didn't qualify. The industry had been moving toward a "best practices" approach, but the settlement now requires standardization to the benefit of homeowners.
Housing experts doubted, however, that the settlement the president described as a "landmark" will have a broader impact on the struggling housing sector.
"Realistically, this is a settlement that at the end of the day will make nobody really happy," said Rick Sharga, a foreclosure expert and executive vice president at Carrington Mortgage Holdings in San Diego.
"Consumer advocacy groups don't think it went far enough," Sharga said. "People watching the housing market won't think it is a cure-all to what ails the market. And from the financial side of things, banks will quickly realize this doesn't remove liability on a host of other issues."
In fact, Obama stressed that the settlement dealt only with problems in the servicing of mortgages and that his administration continues to investigated alleged fraud in the origination of mortgages and in the packaging of them into the complex instruments known as mortgage-backed securities.
There are 43.5 million outstanding mortgages in the United States, according to the Mortgage Bankers Association, and economists estimate that one in four — or more than 10 million — are now thought to be worth less than the mortgages they carry, known as being "underwater."
"Realistically, the settlement wasn't really initiated with the notion of rightsizing every mortgage in the country," Sharga said, suggesting that the problem of upside-down mortgages will continue to dog the impaired housing market in much of the nation. The Treasury Department has been encouraging lenders to forgive the "underwater" portions of mortgages, and Thursday's settlement forces some of that to happen.
Bank of America is responsible for a $11.8 billion payout, comprising $3.24 billion in federal and state payments and $8.58 billion in relief to borrowers. Wells Fargo will pay $5.3 billion; JPMorgan, $5.3 billion; Citigroup, $2.2 billion; and Ally Financial, $310 million.
Bank of America also reached a $1 billion settlement with the U.S. attorney in the Eastern District of New York to resolve claims of underwriting and origination mortgage fraud by the bank and Countrywide Financial.
Bank of America said the settlement was a positive step.
"We believe this settlement will help provide additional support for homeowners who need assistance, brings more certainty to the housing market and aligns to our ongoing commitment to help rebuild our neighborhoods and get the housing market back on track," Bank of America spokesman Dan Frahm said in a statement.
As part of the agreement, Wells Fargo said the participating attorneys general and federal agencies had agreed to release the company from claims and allegations regarding its servicing, modification and foreclosure practices.
"Wells Fargo welcomes the establishment of servicing standards as part of this agreement," said Mike Heid, the president of Wells Fargo Home Mortgage. "We have already made significant investments in our systems and staffing."
Negotiations with nine other major servicers continue, and the settlement could be expanded, to estimates of $30 billion or even $45 billion.
The North Carolina bank commissioner, Joseph Smith, will oversee compliance with the settlement, working from Raleigh. Service providers that violate the deal may face penalties of up to $1 million per violation or $5 million for repeat violations.
"We think this is a big step," said North Carolina Attorney General Roy Cooper, who served on the negotiating team. "It certainly will not be a cure-all for all of the financial meltdown and for all of the problems. But it's a big step to help correct the problems up to the servicing of loans and the foreclosures and the fraudulent documents that were filed."
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