Mortgage lenders will begin making cash payments to homeowners harmed by wrongful foreclosures of anywhere between a few hundred dollars to as much has $125,000 beginning in April, federal bank regulators said Thursday.
The payments were part of a deal struck with 10 banks that abruptly ended a comprehensive review of some 4.2 million mortgages after widespread mistakes were found in documents used to foreclose millions of American homes following the housing bust.
But critics of the settlement, first announced in January, say it doesn't adequately compensate those who lost homes for the harm they suffered.
The review was designed to determine which homeowners were harmed by "robosigning" and other shoddy document practices that resulted in wrongful foreclosures and then compensate those borrowers for their losses. But after more than 18 months and $1.5 billion in fees to independent consultants, only about 104,000 loan reviews had been completed, regulators said Thursday
"It just doesn't make sense for these (mortgage) servicers to continue funneling money to consultants that could be better used to help distressed borrowers who have lost their homes," said Thomas Curry, Comptroller of the Currency, in a speech earlier this month. "The cost of concluding these reviews would far exceed the harm that would be found."
The lenders are Aurora Bank, Bank of America, Citibank, HSBC, JPMorgan Chase, MetLife Bank, PNC, Sovereign Bank, U.S. Bank National Association and Wells Fargo Bank. Three other mortgage lenders, GMAC Mortgage, Everbank and OneWest, didn't sign the deal and will continue their own mortgage reviews.
The banks who agreed to the settlement will pay a total of $3.7 billion to a fund compensating borrowers who were harmed. They've been ordered to review eligible loans and divide them into 11 categories depending on the severity of harm borrowers suffered. Regulators have not yet determined how many borrowers fall into each category
The list ranges from relatively minor clerical mistakes all the way to homes that were improperly seized even though the borrower was not in default. The maximum payout will be $125,000. The average payment represents about $850 per eligible loan.
Critics of the review process argue that the amount paid by the banks is inadequate, and that the settlement amount was based on flawed accounting of harm done to borrowers.
"If the review is being done on the basis of the (mortgage) servicer files, and the servicer files are a mess, how can you make a finding that's accurate?" said Alys Cohen, a consumer attorney at the National Consumer Law Center.
But OCC officials say they had enough information to conclude that the error rate on document processing was about 6.5 percent. Since January, a further review of the data collected indicates the error rate was even lower, Deputy Comptroller Morris Morgan said on a conference call with reporters.
Consumer advocates and several members of Congress are pressing the OCC to disclose the results of the loan reviews that were competed. Earlier this month, Rep Maxine Waters, D-Calif., wrote to Curry requesting a final accounting of the final payments made to homeowners under the settlement.
"Without this information, the public will have no means by which to determine whether relief was provided in a manner that appropriately reflects the overall impact of foreclosures on certain communities and demographic groups," she said.
The settlement is also intended to prod banks to modify more loans and stop foreclosures in progress. They've agreed to pay another $5.7 billion in so-called "soft dollars" that will be used to write down loan balances and approve short sales, in which the banks approves the sale of a house for less than the balance of the mortgage.
Under formulas similar to those worked out in a separate National Mortgage Settlement with the Department of Justice and state attorneys general, banks will receive a series of credits for various types of mortgage relief. Joseph Smith, the independent monitor appointed to oversee that settlement, recently reported that lenders had earned the bulk of those credits by approving short sales and writing down second mortgages.
Housing advocates note that, unlike relief extended to first mortgages, those measures don't directly help keep families in their homes.
Though the pace of new foreclosures has fallen since the depths of the housing crisis, the volume of so-called "distressed" sales continues to weigh on housing prices. Foreclosure-related sales made up 21 percent of all U.S. home sales last year, according to the latest data from RealtyTrac. Short sales made up another 22 percent, meaning two in five transfers involved distressed sales.
OCC officials say their settlement terms are also designed to prevent future foreclosures. Consumer advocates and housing counselors say it's not yet clear whether the measures in place go far enough.
That concern was echoed in Smith's latest report.
"I believe we have made progress, particularly as it relates to consumer relief," he said. "But I know from my regular conversations with advocates across the nation that the banks and I have much more work to do on behalf of borrowers."