The attorneys general of 49 states reached an agreement with the nation’s largest mortgage servicers — five banks that were found to have forged documents and signatures, misled homeowners and the government, and used other “abusive practices” so they could foreclose on Americans’ homes without following the law.
The banks — Ally Financial (formerly GMAC), Bank of America, Citigroup, JP Morgan Chase, and Wells Fargo — will pay a total of about $25 billion in the form of concessions (e.g., principal reductions) to homeowners, compensation to those they unlawfully foreclosed upon, and penalties to the federal and state governments. Bank of America will pay the largest share: about $11.8 billion. (See the chart to the right.)
Where’s it going?
The bulk of the money — about $17 billion — will be used to help borrowers and homeowners in the form of principal reduction, refinancing, and short-sale “deficit forgiveness,” as well as — for borrowers who were victims of the banks’ actions — penalty payments.
More specifically, about a million homeowners are expected to have a portion of their mortgage debt forgiven, while about 750,000 people who were direct victims of the banks (lost their homes to foreclosure between Sept. 2008 and December 2011) will receive $2,000 checks within the next three years.
The remainder will be penalties paid to the states and the Federal government. (See the chart.)
But here’s the “but”
There’s a big elephant in the room. Well, a mule. Ed Demarco, acting director of the Federal Housing Finance Agency (which oversees Fannie and Freddie) has refused to have anything to do with principal reduction, claiming that it will hurt those organizations’ profits.
That means that people who should get a concession from one of the five lenders might not be able to. If a mortgage is backed by Fannie or Freddie, even if the servicer (e.g., Ally, B of A, etc.) offers to forgive some of the debt, the FHFA will block it.
How that will affect the settlement isn’t clear. Do the banks only have to offer $17 billion in concessions, or will they have to find enough borrowers to actually pay that amount?
Also unclear at the moment is exactly who qualifies and how (or whether) they’ll be notified. Government officials suggest that people who used one of the five banks as a mortgage servicer contact those banks for information.
Bank of America
J.P. Morgan Chase
Is this the end?
Not hardly. The government says this is just a first step. “This is neither the beginning nor the end of our work to hold banks and other institutions accountable for the destruction they’ve caused families, communities and country,” said Illinois Attorney General Lisa Madigan.
Despite the banks’ best efforts, the deal leaves them open to individual and class-action lawsuits, punishment for any fair-housing/fair-lending violations, and even civil rights claims.