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Mortgage Plan Gives Homeowners Bulk of the Benefits

Nelson D. Schwartz and Shaila Dewan
Thursday, 9 Feb 2012 | 5:04 PM ET

After months of painstaking talks, government authorities and five of the nation’s biggest banks have agreed to a $26 billion settlement that could provide relief to nearly two million current and former American homeowners harmed by the bursting of the housing bubble, state and federal officials said in Washington on Thursday.

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It is part of a broad national settlement aimed at halting the housing market’s downward slide and holding the banks accountable for foreclosure abuses.

Under the plan, federal officials said Thursday, about $5 billion will go in cash payments to states and federal authorities, $17 billion will be earmarked for homeowner relief, roughly $3 billion will go for refinancing and a final $1 billion will go to the Federal Housing Administration.

If nine other major servicers join the pact, a possibility that is now under discussion with the government, the total package could rise to $30 billion.

Because of the complicated formula being used to distribute the money, federal officials say the ultimate benefits provided to homeowners could equal a larger sum — $45 billion in the event all 14 major servicers participate. There are additional incentives for banks to distribute the money in the next 12 months.

More than just an attempt to aid consumers and stabilize the housing market, administration officials cast the settlement as an effort to finally hold banks accountable for their misdeeds, more than three years after the mortgage meltdown brought on a full-scale financial crisis.

The deal announced Thursday is about “righting the wrongs that led to the housing market collapse,” said Eric Holder, the United States attorney general. “With this settlement, we recover precious taxpayer resources, fix a broken system and lay a groundwork for a better future.”

Financial shares were mixed after the announcement, but most analysts said they considered the settlement to be good news because it removed one cloud hanging over the industry, adding that the banks had already set aside most of the money. Bank of America, which will pay the most as the nation’s biggest mortgage servicer, actually rose half a percent to $8.18 a share in late morning trading.

Despite the billions earmarked in the accord, the aid will help a relatively small portion of the millions of borrowers who are delinquent and facing foreclosure. The success could depend in part on how effectively the program is carried out because earlier efforts by Washington aimed at troubled borrowers helped far fewer than had been expected.

Still, the agreement is the broadest effort yet to help borrowers owing more than their houses are worth, with roughly one million expected to have their mortgage debt reduced by lenders or able to refinance their homes at lower rates. Another 750,000 people who lost their homes to foreclosure from September 2008 to the end of 2011 will receive checks for about $2,000. The aid is to be distributed over three years.

HUD Secretary on $25B Mortgage Deal
Shaun Donovan, the Secretary of the U.S. Department of Housing & Urban Development, discusses the "landmark" $25 billion mortgage settlement with top U.S. banks to help homeowners who have gone underwater on their mortgage payments.

The deal grew out of an investigation into mortgage servicing by all 50 state attorneys general that was introduced in the fall of 2010 amid an uproar over revelations that banks evicted people with false or incomplete documentation.

In the 14 months since then, the scope of the accord has broadened from an examination of foreclosure abuses to a broad effort to lift the housing market out of its biggest slump since the Great Depression. Four million Americans have been foreclosed upon since the beginning of 2007, and the huge overhang of abandoned homes has swamped many regions, like California, Florida and Arizona.

Other multimillion-dollar settlements were announced on Thursday in connection with the years-long mortgage and foreclosure crisis:

  • A mortgage servicing subsidiary of Bank of America. agreed to settle Federal Trade Commission charges that it illegally assessed more than $36 million worth of fees against struggling homeowners, in violation of an earlier settlement with the F.T.C.
  • Bank of America, Citigroup, JPMorgan Chaseand Wells Fargo also agreed to pay a penalty of $394 million as part of a settlement over foreclosure abuses, the Office of the Comptroller of the Currency said.

In New York State, more than 46,000 borrowers will receive some form of benefit, with an estimated 21,000 expected to see what they owe reduced through a principal reduction, according to estimates by the Department of Housing and Urban Development.

The five mortgage servicers in the settlement — Bank of America , JPMorgan Chase , Wells Fargo , Citigroup andAlly Financial — have largely set aside reserves for the expected cost of the accord and investors are likely to cheer its announcement because it removes one more legal worry for the industry, analysts said.

“I wouldn’t say it’s a panacea for the housing industry but it is good for the banks to get this behind them,” said Jason Goldberg, an analyst with Barclays.

As more and more states signed on this week, the negotiations with the banks became especially intense, said one participant, who wasn’t authorized to speak publicly. Two bank officials, Frank Bisignano of JPMorgan Chase and Mike Heid of Wells Fargo, played a critical role in the talks with Shaun Donovan, the secretary of Housing and Urban Development, and Thomas J. Perrelli, the associate attorney general at the Justice Department. Bank of America, which will make the largest payout as the nation’s biggest mortgage servicer, moved more cautiously, the participant said.

How the Money is Doled Out

The settlement money will be doled out under a complicated formula that gives banks varying degrees of credit for different kinds of help. As a result, banks are incentivized to help harder-hit borrowers with homes worth far less than what they owe.

While the $26 billion figure is the one being cited in the negotiations, federal officials said they hope the eventual value for homeowners reaches up to $39 billion. However, mortgages owned by the government’s housing finance agencies, Fannie Mae and Freddie Mac, will not be covered under the deal, excluding about half the nation’s mortgages.

About one in five Americans with mortgages are underwater, which means they owe more than their home is worth. Collectively, their negative equity is almost $700 billion. On average, these homeowners are underwater by $50,000 each.

A recent estimate from the settlement negotiations put the average aid for homeowners at $20,000.

“I just don’t think it’s going to be a life-changing event for borrowers,” said Gus Altuzarra, whose company, the Vertical Capital Markets Group, buys loans from banks at a discount.

Several billion dollars would cover the direct cash payments to foreclosure victims and provide money for states’ attorneys general to services like mortgage counseling and future investigations into mortgage fraud.

Though many economists identify the moribund housing market as the greatest drag on the recovery, it is not clear how much the settlement will help.

Sam Zell: Housing Hole Bigger Today
Weighing in on the severity of the housing crisis and whether government programs can actually help relieve troubled mortgages, with Sam Zell, Equity Group Investments chairman, who says the hole in housing is significantly bigger today than it was when the crisis was discover pre-2007.

Christopher J. Mayer, a housing expert at Columbia Business School, said the accord could give banks more certainty that they can clear their large backloads of seized homes, restoring the flow of those homes into the market.

“It may be good for individual homeowners, but if you don’t do something to help the foreclosure process, it’s not going to help the housing market,” he said.

Mark Zandi, the chief economist for Moodys Analytics, said that while the settlement looked small compared with the scope of the problem, it was not necessary to erase all, or even most, of the nation’s negative equity to turn the market around.

About a third of houses on the market now are distressed, or have been through foreclosure, he said, and reducing that percentage by just a small amount could be enough to put a floor under housing prices.

More than the dollar figures, the settlement had been held up amid concern by New York’s attorney general, Eric T. Schneiderman, that it provided too broad of a release for banks for past misdeeds, making future investigations much more difficult.

Mr. Schneiderman was able to win significant concessions from the banks in recent days.

In the agreement’s expected final form, the releases are mostly limited to the foreclosure process, like the eviction of homeowners after only a cursory examination of documents, a practice known as robo-signing.

The prosecutors and regulators still have the right to investigate other elements that contributed to the housing bubble, like the assembly of risky mortgages into securities that were sold to investors and later soured, as well as insurance and tax fraud.

Officials will also be able to pursue any allegations of criminal wrongdoing. In addition, a lawsuit Mr. Schneiderman filed Friday against MERS, an electronic mortgage registry responsible for much of the robo-signing that has marred the foreclosure process nationwide, and three banks, Bank of America, JPMorgan Chase and Wells Fargo, will also go forward.

Along with how broad the releases would be, California’s attorney general, Kamala Harris, also pushed for her state to be able to use the state’s False Claims Act. That would enable state officials and huge pension funds like Calpers to collect sizable monetary damages from the banks if officials could prove mortgages were improperly packaged into securities that later dropped in value.

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