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Most Underwater Borrowers Not Eligible to Participate in $26 Billion Mortgage Settlement

Written By:
March 14, 2012 at 11:51 PM

JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Ally Financial will let out a collective sign a relief on Monday because the Justice Department filed for court approval of the mortgage settlement reached several weeks ago. The agreement, which took more than one year to work out, amounts to $6 billion more than the initial amount of $20 billion floated about by the mortgage lenders early in the negotiations.

Since the announcement of the mortgage settlement, individual homeowners have started to discern what the agreement means for their personal circumstances. Some market players believe the deal does not help enough homeowners. Furthermore, the five lenders walk away, after causing serious damage to the housing market and the economy without adequately paying for their actions.

Agreement Helps a Fraction of Struggling Homeowners

An increasing number of borrowers believe the banks got away with what amounts to a scolding compared to the damage cause to more than 3.5 million homeowners who lost their homes to foreclosure and the US economy. Under the agreement, 750, 000 borrowers will collect a lump-sum payment of $1,800 to $2,000.

However, with 11 million homeowners living in properties with mortgage balances higher than the property values, the mortgage settlement gives a minuscule percentage of homeowners some degree of financial relief. Mark Zandi, chief economist for Moody Analytics, compares the settlement to hitting a single instead of a home run.

Only borrowers who have mortgages held by one of the five lenders qualify for mortgage reduction. Several days ago, Bank of America agreed to reduce the principal on the mortgages of about 200,000 homeowners to a 100% loan-to-value ratio. This means the home value of these borrowers will be equivalent to the market value of their home.

Homeowners who have mortgages with the other lenders will receive an average principal reduction of $20,000. Consequently, a large number of borrowers remain burdened with mortgages worth more than their homes. In total, about 1 million homeowners will end up with a principal reduction.

Borrowers who have mortgages held by Freddie Mac, Fannie Mae and the Federal Housing Agency (FHA), which is about half of the residential mortgage market, do not qualify for this principal reduction program.

Homeowners against Bailing Out Other Borrowers

Some homeowners feel that they have played by the rules and been responsible borrowers. Therefore, they did not over-leverage their homes and get themselves into financial trouble. Therefore, “responsible” taxpayers should not have to bail reckless homeowners.

Even before the government announced the settlement, the chorus against bailing out homeowners took on a regional flavor when Senator Corker of Tennessee met with some contingents. “Reducing the principal on home loans for borrowers who put no money down amounts to a massive wealth transfer from places like Tennessee, where most homeowners have borrowed responsibly, to places like California and New York, where exotic mortgages were widely used to finance a speculative housing boom,” says Senator Corker.

About $3 billion of the settlement money will go to refinancing mortgages for eligible homeowners who have managed to keep their monthly payments current.

Homeowners Have Other Recourse

The mortgage settlement grants the five banks immunity from civil litigation related to the “robo signing” scandal. Nonetheless, homeowners who believe they suffered damage that is more significant can pursue other two other options:

  1. Request a review of the foreclosure file. The borrower will have to provide supporting documentation, which supports the case that the bank foreclosed on the home inappropriately, which entitles the homeowner to a specified amount of compensation.
  2. Borrowers can also file lawsuits against the mortgage lender for breaking certain laws or treating the homeowner unfairly.

The government will oversee the administration of the settlement. Mortgage servicers must monitor and track their performances. The agreement remains in force for three years.

Many homeowners, who have mortgages owned or insured by Fannie Mae or Freddie Mac, could refinance from high interest rate mortgages to low interest loans under the Home Affordable Refinance Program (HARP) Other may qualify for the Home Affordable Modification Program (HAMP), which changes the terms of their loans. Contact your mortgage servicer for more information.





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