Federal and state agencies today announced a landmark $25 billion civil settlement against mortgage lenders after a year-long investigation into an institutionalized culture of foreclosure abuse.
The settlement, over faulty foreclosure practices servicers instituted shortly after the housing market crashed, is the largest ever federal-state civil settlement.
Another victory for the Obama Administration, the hard fought settlement also has been reported as a $26 billion deal that could grow to $30 to $40 billion if more servicers sign on. The agreement also leaves the door open for the federal government, states and individuals to file charges.
Hopefully, the settlement will “Begin to turn the page on an era of recklessness that has left so much damage in its wake,” said President Obama in a video statement from the White House.
“It was wrong and it cost more than 4 million families their homes to foreclosure. Many companies that handled these foreclosures didn’t give people a fighting chance to hold onto their homes,” the president added.
Multi-billion dollar decision
Initially, Bank of America, JP Morgan Chase, Citigroup, Ally Financial and Wells Fargo, banks that were rescued with taxpayer money, signed onto the agreement to provide $17 billion in mortgage relief that includes principal reductions of up to $20,000 to more than 1 million homeowners.
The servicers are also expected to send checks of about $2,000 to an estimated 750,000 Americans who suffered improper foreclosures.
Another $1 billion will go to the federal government and $3 billion will help servicers refinance borrowers into lower-interest rate loans.
The settlement won’t assist all homeowners in dire financial straights. It does not cover mortgages held by Fannie Mae and Freddie Mac.
“I really don’t see this as being that big a deal. In reality, the total number of dollars is still small compared to the value of the mortgages that are underwater. To some extent, the numbers reflect losses the lenders would have taken anyway. As a result, the net impact is probably not as large as they are saying,” said Richard Green, director of the University of Southern California’s Lusk Center For Real Estate, an industry research, education and outreach effort.
The case was filed by the U.S. Department of Justice, U.S. Department of Housing and Urban Development and the Conference of State Bank Supervisors. The Federal Reserve will assess monetary sanctions against the parent holding companies of the mortgage servicers.
The settlement is payback for a twisted culture of foreclosure violations including “robo-signed” (forged or falsified) affidavits in foreclosure proceedings; deceptive practices, including “dual tracking” (simultaneously working a modification application and a foreclosure procedure on a mortgage); failures to offer non-foreclosure alternatives before foreclosing on borrowers with federally-insured mortgages; filing improper documentation in federal bankruptcy court, losing and misplacing crucial homeowner documents and generally giving distressed homeowners the runaround, rather than a single point of contact.
The state of Oklahoma was the only holdout refusing to go along with the deal. Its struggling homeowners ironically will remain unsettled Sooners in the red (the state is named for Choctaw words that mean “red people”), suffering their state attorney general’s concern the penalty went beyond the scope of the original investigation. Oklahoma gets nothing from the settlement, except the right to file it’s own suit.
California, along with New York, had back peddled on the deal for some time but ultimately went along with it, though not without plans to further punitive efforts for services and relief efforts homeowners in one of the states hardest hit by the housing crisis.
“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.
More than billions of dollars
The relief must be extended within three years or servicers will have to pony up cash for any remaining part of the settlement. Servicers that do work sooner will get more credit for modifying and refinancing loans.
According to the U.S. Department of Justice, the joint federal-state agreement also requires the mortgage servicers to implement unprecedented changes in how they service mortgage loans, handle foreclosures, and ensure the accuracy of information provided in federal bankruptcy court.
The agreement requires new servicing standards designed to prevent foreclosure abuses and create dozens of new consumer protections. New standards will include strict oversight of foreclosure processing, including third-party vendors, as well as new requirements associated with pre-filing reviews of documents filed in bankruptcy court.
Under the new rules foreclosures will become a solution of last resort. Servicers must evaluate homeowners for other loss mitigation options before proceeding with a foreclosure. Banks will be restricted from foreclosing while the homeowner is being considered for a loan modification.
The new standards also include procedures and timelines for reviewing loan modification applications and they will give homeowners the right to appeal denied modifications and other workouts. Servicers will also be required to create a single point of contact for borrowers seeking information about their loans and maintain adequate staff to handle calls.
If servicers hire the true number of people they’ll need to comply with the settlement the new standards more Americans could find jobs.
In statement from Center for Responsible Lending president Michael Calhoun, he said “The foreclosure settlement announced today will help build a stronger housing market while keeping more people in their homes. But while a significant step toward fixing the foreclosure crisis, this settlement was never intended or able to provide a comprehensive remedy. Much more work is required.”
“Now, I want to be clear. No compensation, no amount of money, no measure of justice is enough to make it right for a family whose had their piece the American Dream taken wrongly from them. And no action, no matter how meaningful is going to, by itself, entirely heal the housing market. But this settlement is a start and we are going to make sure that the banks live up to their end of the bargain,” said the president.
• For more information, see the “National Mortgage Settlement.”
• To find your state attorney general’s website and learn more about state-specific committments, go to the National Association of Attorneys General.
• For more coverage see DeadlineNews.Com’s: National Mortgage Settlement Page