In what has been characterized as a major development, a team of federal and state negotiators announced they had finally reached an agreement with the five major lenders. The $26 billion deal settles some of the issues connected with the housing crisis.
The state and federal negotiators consisted of representatives from the state attorney generals offices, U.S. Department of Housing and Urban Development, and U.S. Department of Justice. The five firms signing the agreement were Wells Fargo, J.P. Morgan Chase, Citigroup, Bank of America, and Ally Financial
Forty-nine states have agreed to the terms of the deal. Getting the California and New York Attorney Generals to sign on was a big win for the loan servicers.
The lone hold out, Oklahoma Attorney General Scott Pruitt reported he reached an $18.6 million settlement for residents who lost their homes in the improper foreclosure proceedings. According to Pruitt, he believes the settlement reached by the negotiators go beyond the bounds of both state and federal authorities.
Settlement money to target principal reduction
Principal reduction has been one of the issues at the core of the settlement talks, which have taken place for more than a year. The deal calls for about one million homeowners who have underwater mortgages to will receive an average principal reduction of $20,000, according to HUD Secretary Shaun Donovan.
If a significant number of homeowner requires deeper principal reductions, the terms of the settlement require lenders to work with homeowners who are in serious trouble with their loans. This provision can send final costs escalating to $34 billion.
Other components of the settlement
As many as 750,000 homeowners, who have an underwater mortgage, will not qualify for principal reduction. However, these homeowners will have the option of refinancing from high-interest mortgages to low interest rate loans.
The concept is to reduce their monthly principal and interest payment, which gives them some financial relief.
Some analysts believe principal reductions have a significant effect on reducing foreclosures. Fewer foreclosures help stabilize neighborhoods that have been devastated by foreclosures.
Homeowners who lose their home in foreclosure, from January 1, 2008 to December 31, 2011, will receive up to $2,000 each. These homeowners will retain their right to file a suit to recover other damages related to improper foreclosures.
About $3 billion will go into an account to make up for the reduced interest payments mortgage lenders will receive after refinancing loans from high interest rate mortgages. States will receive $5 billion. Some of the money will go to homeowners impacted by foreclosure practices, and the rest to the states.
The settlement requires the federal government to monitor the entire process with the aim of eliminating obstacles and unnecessary paperwork, which have plagued the processes of other housing programs, such as Home Affordable Modification Program (HAMP) or Home Affordable Refinance (HARP).
Eligible homeowners will receive most of the benefits from the settlement over the next year, but will be able to receive help for the next three years.
Lenders still have some liability
Mortgage servicers escaped potential criminal liability or breaking state laws related to foreclosures, including false signatures, and taking homes without correct documentation.
Legally, the banks are not completely out of the water. The settlement protects mortgage servicers from future servicing and originating claims -- at the state level. States and federal government can still pursue criminal charges for “root” improprieties, which led to the housing crisis.
Private homeowners can also pursue litigation against mortgage lenders.
The settlement only applies to mortgages that have not been sold to Fannie Mae or Freddie Mac. This is not the final settlement because talks are still ongoing, which will bring nine other servicers in on the deal. This could increase the amount of the settlement to $30 billion.
A rash of other announcements related to settlements and the housing sector meltdown have made the rounds in the last few days. The Bank of America Bank (Countrywide Financial Corporation), and the US Attorney in New York worked out a $1 billion settlement in connection to a mortgage origination and underwriting fraud case. In addition, five banks agreed to pay the Feds $766.5 million for loan servicing improprieties.