WASHINGTON – State and federal regulators on Thursday announced a settlement worth at least $25 billion with Bank of America and four other large banks, ending several years of litigation over alleged foreclosure abuses. The deal offers some help to struggling homeowners, but experts view it more as a moral victory with limited impact on the broader housing market.
The announcement capped months of negotiations that involved federal regulators, state attorneys general, consumer advocacy groups and big players on Wall Street and in finance. It was the largest government-industry settlement involving states since the $200 billion-plus tobacco industry settlement in 1998.
The settlement effectively punishes the banks for alleged abuses in the foreclosure process, including robo-signing, in which fraudulent documents are used in court proceedings when trying to take back properties from homeowners who are delinquent on their mortgages.
“Under the terms of this settlement, America’s biggest banks, banks that were rescued by taxpayer dollars, will be required to right these wrongs. And that means more than just paying a fee,” President Barack Obama said.
The banks are required to dedicate $20 billion in relief to homeowners, including $10 billion toward reducing principal for struggling borrowers. The banks also must provide $5 billion in cash to federal and state governments to assist their foreclosure relief programs.
About 1 million households at risk of foreclosure should be able to reduce their loans. About 750,000 others who lost their homes to foreclosures will receive about $2,000 each. The banks have three years to distribute the assistance, and the deal will be monitored for compliance.
The five banks that agreed to settle federal and state investigations are Bank of America, which is on the hook for the biggest payout; JPMorgan Chase; Citigroup; Wells Fargo; and Ally Financial. Ally is a Detroit-based bank-holding company affiliated with Chrysler and General Motors and still partially owned by the federal government.
Not everyone will qualify for help with mortgages. The settlement money will be used on a state-by-state basis to help wipe out some of the principal on mortgages that aren’t owned or backed by Freddie Mac or Fannie Mae – together about 55 percent of all outstanding mortgages. Those mortgages must be of values higher than current market prices for the homes.
Late Thursday, the Justice Department announced another agreement in which Wells Fargo, Citigroup and Ally will be required to provide any military-service member who was the victim of a wrongful foreclosure with a minimum of $116,785, plus the service member’s lost equity and interest. Service members also will be compensated for any additional harm suffered.
Consumer advocacy groups applauded the settlement.
“Despite its limitations, the settlement requires real reforms in the mortgage-servicing industry to stop sloppy business practices and out-and-out fraud. It also will help stabilize housing markets and property values by giving more homeowners a chance to restructure or refinance out of unaffordable loans that are underwater,” Michael Calhoun, the head of the Durham, N.C.-based Center for Responsible Lending, said in a written statement.
Apart from the settlement money, the deal requires the first-ever standardization of practices for mortgage servicers. Often owned by big Wall Street banks, they collect mortgage payments on behalf of investors who own pools of mortgages that have been packaged as bonds.
“It is a pretty major step to ensuring that servicers will be standardized and have much more consumer-friendly processes … and that’s a big step forward,” said Barry Zigas, director of housing policy for the Consumer Federation of America.
Housing experts doubted, however, that the settlement Obama described as a “landmark” will have a broader impact on the struggling housing sector.
“Realistically, this is a settlement that at the end of the day will make nobody really happy,” said Rick Sharga, a foreclosure expert and executive vice president at Carrington Mortgage Holdings in San Diego.
“Consumer advocacy groups don’t think it went far enough,” Sharga said. “People watching the housing market won’t think it is a cure-all to what ails the market. And from the financial side of things, banks will quickly realize this doesn’t remove liability on a host of other issues.”
Obama stressed that the settlement dealt only with problems in the servicing of mortgages, and that his administration continues to investigate alleged fraud in the origination of mortgages and their packaging as mortgage-backed securities.
There are 43.5 million outstanding mortgages in the United States, according to the Mortgage Bankers Association, and economists estimate that more than 10 million homes are thought to be worth less than the mortgages they carry, known as being “underwater.”
“Realistically, the settlement wasn’t really initiated with the notion of right-sizing every mortgage in the country,” Sharga said, suggesting that the problem of upside-down mortgages will continue to dog the housing market in much of the nation. The Treasury Department has been encouraging lenders to forgive the “underwater” portions of mortgages, and Thursday’s settlement forces some of that to happen.
Bank of America is responsible for an $11.8 billion payout, including $3.24 billion in federal and state payments and $8.58 billion in relief to borrowers. Wells Fargo will pay $5.3 billion; JPMorgan Chase, $5.3 billion; Citigroup, $2.2 billion; and Ally Financial, $310 million.
Bank of America also agreed with the U.S. attorney in the Eastern District of New York to pay $1 billion to resolve claims of underwriting and origination mortgage fraud by the bank and Countrywide Financial.
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