US, banks reach $26B foreclosure deal

Federal and state officials have reached a nearly $26 billion agreement with banks that would help millions of homeowners recoup losses and modify their underwater mortgages.

Under the settlement, Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial will cover all the costs of reducing mortgage principal, refinancing loans and paying back homeowners for improper foreclosures and other mortgage-servicing abuses.

Federal and state authorities began investigations in 2010 into the so-called robo-signing by the banks, a practice where lenders signed off on foreclosures without thoroughly examining the contents and verifying the information. The probes led to negotiations with the banks, which lasted 16 months until a deal was reached Wednesday night, with New York and California agreeing to join in the settlement. Other states that had wavered, including Massachusetts, also are signing off on the agreement. Only one state, Oklahoma, held out and won’t receive any money under the deal.

Housing Secretary Shaun Donovan emphasized that the settlement isn’t limited to $26 billion and that consumers could receive at least $35 billion in mortgage principal reductions.

The agreement could continue to expand, possibly to upward of $45 billion if another batch of banks joins the agreement, Donovan said.

At least $3 billion will go toward refinancing the loans for homeowners who are current on their mortgage payments but who are underwater and at least $10 billion for reducing mortgage amounts.

About $1.5 billion will go toward for direct payouts, with about 750,000 homeowners receiving checks between $1,500 and $2,000 for improper foreclosures.

Another $3.5 billion will go directly to states and about $7 billion is headed for other state homeowner programs.

In addition to the payments and mortgage reductions, the deal promises to reshape long-standing mortgage lending guidelines. It will make it easier for those at risk of foreclosure to make their payments and keep their homes.

Donovan and Iowa Attorney General Tom Miller, who headed up the investigation, stood by the strength of the deal despite criticism that it doesn’t go far enough.

“This is a strong creative agreement to help homeowners in significant ways,” he said. “This is far more than anybody else has in the past in this context and I predict far more than anyone in the future.”

He said he expects the deal to make widespread principal reduction “commonplace.”

Miller said that the agreement has “teeth” and provides homeowners with a fast avenue to show how they were wronged by lenders and ensure that banks provide timely and cost-effective loan modifications for any homeowner who is eligible.

For example, if homeowners are charged improper fees they can file a claim with a “monitor” that will recoup them without the need for lawsuits, Donovan said.

If homeowners were wronged in any way they can have those claims reviewed at the cost of banks and full compensation will be made regardless of the cost — from hundreds in fees to a wrongful foreclosure on a $200,000 house, Donovan said.

“There were many small wrongs that were done here,” Donovan. “This does not resolve everything. We will be aggressive about going after claims elsewhere.”

Miller and Donovan also pushed back against the idea that investors are covering the cost for banks.

“These are real penalties and real costs for the banks,” Donovan said during a press conference.

Miller said that investors do better if homeowners receive a principal reduction because they get more money than with a foreclosure.

Congressional Democrats have been pressing for government-controlled Fannie Mae and Freddie Mac to reduce principal loan balances for those underwater on their mortgages but current on their payments.

The settlement applies to private loans — no government-held loans are included.

Lenders could face millions in penalties for violating the deal.

“Going forward, the Consumer Bureau will be examining servicers throughout the industry to make sure they are following the law,” said Richard Cordray, director of the Consumer Financial Protection Bureau in a statement.

“We will also be issuing rules to bring greater fairness and transparency to the mortgage servicing marketplace,” he said. “And where we find unlawful practices, we will not hesitate to use our full authority to protect consumers and hold all servicers accountable.”

On Capitol Hill, Speaker John Boehner (R-Ohio) told reporters on Thursday that “clearly
if there was wrongdoing done by some of these mortgage lenders, they
should be held accountable.”

Updated at 1:08 p.m.