Banks to Face Tough Reviews, Details of Mortgage Deal Show

Banks will face stiff penalties and intense public scrutiny if they fail to live up to the standards of a $25 billion mortgage settlement with state and federal authorities, according to court documents filed as part of the deal Monday in federal court in Washington.

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While the broad outline of the deal was announced last month, the mechanics of the agreement that took more than a year to negotiate were laid out in Monday’s filing, including exactly how much credit the five banks would receive for varying levels of loan forgiveness and just what kind of conduct from the past is off-limits to future investigations.

“We are taking a zero-tolerance approach,” said one senior Obama administration official on Monday morning, who spoke on condition of anonymity because the documents had not yet been filed.

Banks must review their adherence to the new rules every quarter through a random sampling of cases, with a maximum threshold for errors at 1 percent in some cases if they are to avoid fines. “Any error that is found during the sampling process will have to be corrected,” the official said.

In some cases, servicers would face civil penalties of up to $1 million for each violation of Monday’s consent order. Repeat violations could bring fines of $5 million each. An independent monitoring and enforcement office is being set up under the agreement, to be paid for by the banks, that will be led by Joseph A. Smith Jr., the former North Carolina banking commissioner.

The complaint, which specifies the terms of the settlement, comes nearly 18 months after reports of “robo-signing” and other abuses in the foreclosure process set off a nationwide furor, and marks another legal milestone in the wake of the bursting of the housing bubble and the financial crisis of 2008-9.

The five banks covered by the settlement — Bank of America , JPMorgan Chase, Wells Fargo, Citigroup and Ally — engaged “in a pattern of unfair and deceptive practices,” according to the complaint. Besides failing to perform modifications for borrowers seeking to ease the terms of their loans, the documents also cite what consumers have been complaining about for years: lost applications and other paperwork, inadequately trained staff and wrongfully denied modification requests.

Despite the bold talk from administration officials, the settlement covers only mortgages owned by the banks or serviced by them on behalf of private investors. Mortgages held by government-sponsored enterprises like Fannie Mae and Freddie Mac or backed by the Federal Housing Administration, which make up about 56 percent of the $8.8 trillion in mortgage debt in the United States, do not fall under the scope of the accord.

In some ways, the actual filing of the suit by Department of Justice lawyers was anti-climactic, coming after a press conference last month with the secretary of the Department of Housing and Urban Development, Shaun Donovan, and the attorney general, Eric Holder. But there has been grumbling since then that the deal didn’t go far enough.

Critics argued the $25 billion settlement barely makes a dent in the housing market’s problems, especially in light of the $700 billion in negative equity held by Americans whose homes are worth less than their mortgages. Banks, they argue, could have afforded to pay much bigger fines.

In addition, the issue of just how much wrongdoing would be exempted by so-called releases governing future investigations was hard fought until the last minute of the negotiations between the banks and regulators in February.

The Department of Housing and Urban Development has been especially irked by the criticism, as have the state attorneys general who started the investigation in the fall of 2010. In response, HUD put a presentation on its Web site Monday entitled “Myth vs. Fact: Setting the Record Straight About Historic Mortgage Servicing Settlement.”

The bulk of the settlement paid by the banks, about $20 billion, would go to one million American homeowners who would have their mortgage debt reduced or their loans refinanced at a lower interest rate. It also includes $1.5 billion for roughly 750,000 people who lost their homes to foreclosure between 2008 and 2011, with each receiving between $1,500 and $2,000.

Four million Americans have been foreclosed upon since the beginning of 2007, and the huge overhang of abandoned homes has swamped many states, including California, Florida and Arizona. About one in five Americans with mortgages are under water, which means they owe more on their mortgage than the home is worth. On average, these homeowners are under water by $50,000 each. Over all, there are 48.5 million mortgages in the United States, about 10.7 million of which are under water.

A recent estimate from the settlement negotiations put the average aid for homeowners at $20,000, but a separate agreement in the filing Monday indicates that Bank of America could provide relief valued at roughly $100,000 per homeowner in about 200,000 cases. Ally will also provide greater relief under a separate agreement with regulators.

The help is aimed principally at underwater borrowers, and banks receive more credit toward what they are obligated to pay under the settlement for forgiveness of the worst cases.

For example, if the value of a mortgage exceeds what the house is worth by 140 percent to 175 percent, the bank would get roughly five times more credit for reducing that loan than it would on a mortgage that is worth 105 to 115 percent of the home’s value.

Under the agreement, the banks will also pay money directly to state attorneys general offices to finance foreclosure relief programs. California will get the most, $410.5 million, followed by Florida at $334 million. New York is to receive $107.6 million; New Jersey, $72.1 million; and Connecticut, $26.1 million.

Homeowners seeking more information, including contact numbers for the five participating banks, can go here.