The cost of faking a foreclosure document continues to rise. Ten banks will now pay $8.5 billion to borrowers for so-called "robo-signing," a fraudulent practice uncovered two years ago that sent the mortgage market into yet another tail-spin.
Nearly four million borrowers will get either direct payments or mortgage assistance ranging anywhere from a few hundred dollars to over a hundred thousand dollars, according to federal regulators.
The settlement is the result of an independent foreclosure review ordered by the Office of the Comptroller of the Currency in 2011. It required banks to hire independent auditors to go back over loans from 2009 and 2010 to look for foreclosure abuses, but the reviews were taking too long and costing too much. (Read More: Mortgage Recovery Still Rocky.)
"When we began the Independent Foreclosure Review, the OCC pledged to fix what was broken, identify who was harmed, and compensate them for that injury," said Comptroller of the Currency Thomas Curry in a written statement. "While today's announcement represents a significant change in direction, it meets those original objectives by ensuring that consumers are the ones who will benefit, and that they will benefit more quickly and in a more direct manner."
The banks, including Bank of America, Citibank, JPMorgan Chase and Wells Fargo, will make $3.5 billion in direct payments to borrowers and $5.2 billion in other assistance, such as loan modifications and forgiveness of deficiency judgments. Four other banks, EverBank, Ally, HSBC and One West, were involved in the talks but did not sign the deal. Together they service close to half a million loans. The OCC says conversations with them continue.
All 3.8 million borrowers, designated as those who were in any stage of foreclosure in 2009 or 2010, will receive something, regardless if they were wronged in any way, according to federal regulators. The loan servicers will divide borrowers into eleven different categories, and the regulators will designate a standard payment for each category.
Bank of America's share will be the largest at just under $3 billion in direct payments and borrower assistance. Bank of America took on the ills of Countrywide Financial.
"We support the new approach because it expands the number of borrowers who will receive payment, speeds the delivery of those payments, and will provide support for homeowners still struggling to make payments and encourages continued community stabilization efforts and recovery of the housing market," said Bank of America spokesman Dan Frahm.
This settlement follows a $25 billion deal last year with many of the same mortgage servicers and state attorneys general. So far that has resulted in nearly $22 billion in consumer relief and $4.2 billion pending to 300,000 borrowers through the end of September, roughly $84,385 per homeowner. (Read More: Forty States Sign On to Foreclosure 'Robo' Settlement.)
The announcement of Monday's deal, however, brought criticism that the end of the reviews would close the book on a nasty chapter in the mortgage market that was just beginning to come to light.
"There will never be an analysis of the lenders violations and wrongful acts that caused this mortgage crisis," said Bruce Marks, CEO of the Neighborhood Assistance Corporation of America. "That's why I believe these lenders want to put this to bed now." (Read More: Housing Recovers, but the Repo Man Is Back.)
Payments to borrowers will be administered by a "payment agent," according to a release from the OCC and the Federal Reserve, and eligible borrowers are expected to be contacted by the end of March with details. Some lawmakers are troubled by details like this and the rush to settle.
"I am deeply disappointed that the OCC and the Federal Reserve finalized this settlement and effectively terminated the Independent Foreclosure Review process before providing Congress answers to serious questions about how this settlement amount was determined, who these funds will go to, and what will happen to other families who were abused by these mortgage servicing companies but have not yet had their cases reviewed," said Rep. Elijah E. Cummings, D-Md. and ranking member of the House Committee on Oversight and Government Reform, in a statement. "I do not know what the rush was to make this settlement without answering these key questions."
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While some of the money will go to help borrowers currently behind on their mortgages, many who already lost their homes to foreclosure will simply get a check for a few hundred dollars. As for the 5 million loans currently in default or in the foreclosure process, this settlement will do little to bring those numbers down.
"It remains to be see how the money will be spent. But you would need hundreds of billions of dollars to put a dent in foreclosures via principal forgiveness," said Guy Cecala of Inside Mortgage Finance.
He thinks the settlements should pave the way for more normal foreclosure processing. "Could we see a surge in foreclosures as banks move to clear the pipeline of defaulted mortgages? Possibly, now that most of the robo-signing charges are behind them."