Last week, Housing and Urban Development Secretary Shaun Donovan stated negotiators, representing various federal agencies and most state Attorney General (AG) offices, have reached the final stages of a settlement with the five largest mortgage servicers? Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally.
The settlement is suppose to remedy the wrongdoings related to foreclosure practices where lenders failed to verify the accuracy of information on foreclosure paperwork and falsified signatures on many documents.
Since the housing bubble burst, in late 2006, approximately 8 million homeowners have lost their home to aggressive foreclosure activities by the banks.
Iowa's Attorney General, Tom Miller, who serves as lead negotiator, announced that Attorney Generals for all 50 states have received paperwork, which outlines the new mortgage servicing criteria proposed by the banks and delineates various options the banks could put in place to assist struggling homeowners.
Settlement Amount Depends on California's Participation
The Attorney Generals (AGs) will evaluate two possible scenarios for a final settlement. The first deal depends on California agreeing to the settlement. The loan servicers will pay up to $25 billion, according to sources familiar with the negotiations.
The second option kicks in if California rejects the banks’ settlement offer—the settlement amount falls to $19 billion.
California Atty. Gen. Kamala Harris has been a thorn in the side of lenders because she believes negotiators have not been hard enough on the banks. Since California ranks in the top four states (Nevada, Florida and Arizona) incurring foreclosure activities, it works to the lenders’ advantage to bring the AG in on any agreement, which would limit their future legal and financial liability.
Draft Settlement Terms
According to Donovan, as many as 1 million American homeowners would receive mortgage modifications. Lenders will also reduce the outstanding balance on 1 million mortgages, by an average of $20,000 each.
Other options in the final settlement may include:
- Lenders will change current practices to allow borrowers to qualify for mortgage modifications if they face possible foreclosure on their homes.
- Include a “favored nation clause” that allow states signing on to the settlement receive better terms if “a holdout state” wins a better deal for its constituents
- Approximately, 750,000 homeowners, about 50% of households able to qualify for assistance under the settlement, will receive about $1800.
- The settlement will only apply to homeowners with privately held mortgages made between 2008 and 2011.
Homeowners who lost their homes through foreclosure, will not have recourse for reclaiming their homes and will not receive much in terms of financial damages.
Holdout AGs Seek More Accountability and Restitution
Ms. Harris and New York AG Eric Schneiderman have been very vocal about how “settlement talk” centered on aspects, such as mortgage servicing and robo-signing issues. They lament the lack of a thorough investigation of the banks’ loan origination process and sale of loans, or mortgage-backed securities, to investors.
In late 2011, Delaware, Massachusetts and Nevada AGs filed lawsuits against mortgage lenders.
Delaware’s AG, Beau Biden, filed litigation accusing the shell company set up by lenders to manage mortgage paperwork, Mortgage Electronic Registration System (MERS) with complicating the process to make it more difficult for homeowners to stop the foreclosure process.
The litigation filed by Massachusetts Attorney General Martha Coakley centers on “deceptive foreclosure practices” by the five major mortgage lenders. Nevada Attorney General Catherine Cortez Masto’s lawsuit charges Bank of America with deception.
Resistance to Settlement
Many middle-class housing advocates question the wisdom of entering into a settlement with lenders, especially when experience has demonstrate the inability of Bank of America to follow through on a similar settlement.
Case in point, in 2008, the Bank of America reached an agreement with 12 Attorney Generals to provide as many as 400,000 mortgage modifications, worth an estimated $8.4 billion, to homeowners.
Starting December 1, 2008, Bank of America agreed to do four things to remedy grievances against the institution:
- Reduce the principal on mortgages
- Mortgage refinance
- Modify foreclosure operations
- Suspend foreclosure activities on homeowners affected
In August 2011, Nevada's Attorney General Catherine Cortez Masto filed a complaint in the United States District Court in Reno, which accused Bank of America of reneging on this agreement. Masto asked the court to allow Nevada to with draw from the settlement agreement.
According to Masto, Bank of America was deficient in several areas regarding the obligations it agreed to under the settlement:
- Failing to modify mortgages of qualified homeowners
- Raising the interest rate on modified loans instead of reducing them as promised.
- Pursuing foreclosure activities when mortgage modifications were pending
- Failing to meet the 60-day requirement of granting new loan terms to borrowers
Masto states in the complaint, Bank of America “materially and almost immediately violated” conditions of the agreement reached with the AGs.
Consequently, many homeowners suffered further damage by the lender’s transgressions.
Conclusion
Along with the settlement, some analysts expect the Obama administration to continue pushing lenders to expand the number of homeowners eligible for mortgage modifications or mortgage refinancing. In addition, the proposal to turn foreclosed homes into rental properties—to reduce the number of foreclosed homes on the market , may soon become a reality.
Since the negotiations started, numerous reports have surfaced declaring a settlement “as imminent,” failing to materialize for various reasons.“ However, this announcement may represent the “real deal” because of the approaching 2012 elections.