$25B foreclosure deal: What it could mean for homeowners

(MoneyWatch) 

Government officials announced Monday the nation's five biggest lenders have agreed to overhaul the industry after deceptive foreclosure practices and robo-signing caused many homeowners to lose their homes. The proposed settlement applies to privately held mortgages issued between 2008 and 2011.

According to an Associated Press report, five major banks -- Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial -- and U.S. state attorneys general could adopt the agreement within weeks. It's expected President Barack Obama will mention new developments in the negotiations in his State of the Union address on Tuesday.

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A settlement between the banks and the states doesn't mean homeowners who lost their homes to foreclosure will get them back. In fact, they're unlikely to benefit much at all financially, though the total financial settlement could be as high as $25 billion.

What's worse is the settlement does not apply to loans held by Fannie Mae or Freddie Mac. Since Fannie and Freddie own about half of all U.S. mortgages - or 31 million U.S. home loans - that means a lot of homeowners who have been hurt by the banks' deceptive foreclosure practices won't be getting much-needed assistance.

Here's how the settlement could shape up:

-- $17 billion would go toward reducing the principal balance struggling homeowners owe on their mortgages.

-- $5 billion would be put into a reserve account for various state and federal programs. A portion of this money would cover the $1,800 checks that would be sent to homeowners affected by deceptive practices. Only about 750,000 Americans, or half of the households who might be eligible for assistance under the deal, will likely receive checks.

-- About $3 billion would be used to help homeowners refinance at 5.25 percent, far above current mortgage interest rates.

Nearly 11 million people - one in four homeowners - owe more than their home is worth. According to current guidelines, these underwater homeowners have few options and little chance at refinancing.

If the proposed settlement terms are accepted, roughly 1 million of these homeowners could see the principal amount of their mortgages reduced by an average of $20,000. That's good news for some, but bad news for the other 10 million homeowners who would like to claim a principal reduction but won't qualify.

The better news is this settlement has the potential to reshape long-standing lending guidelines and make things easier for at-risk and underwater homeowners across the board. But critics say it doesn't do enough. Sen. Sherrod Brown (D-Ohio) tells the Associated Press: "Wall Street is again trying to pass the buck. Instead of criminal prosecutions, we're talking about something that's not more than a slap on the wrist."

Some states have disagreed over what to offer banks, with states like New York, Delaware, Nevada and Massachusetts arguing banks should not be "protected from future civil liability." The deal will not fully release banks from future criminal lawsuits by individual states, and a few of those states' attorneys general have already promised to pursue their own investigations.

Bank officials have argued few, if any, foreclosures wrongfully took place as a result of documentation issues. Ally Financial CEO Michael Carpenter has been among the most vocal, claiming the company found no instances of wrongful foreclosure after its own internal audit. Carpenter has said he will fight the government in court if need be.

Brown tells HousingWire: "[The settlement] is not vengeance against banks. It's [incentivizing] better behavior in the future." If the banks are held accountable and realize there are consequences to misleading practices, it's possible this settlement could have far-reaching effects.

If you're a homeowner who is not affected by the settlement but has questions about your options, contact the Homeowner's HOPE hotline at 1-888-995-HOPE.

The Associated Press contributed to this report

[jpb168]

What about the people who are living under bridges or in cars with their families? Who is going to give them redress for the fraud that continues in the mortgage industry? Our government's failure to hold the mortgage and Wall Street principles involved accountable (criminally) will only breed contempt for the rule of law in our country. One country, two systems.

[acrelan]

This settlement will benefit the banks more than it will help any homeowner. There should be a full investigation into the banks practices including Freddie and Fannie. A 20k principal reduction when the value dropped by over $100k, 5.25% interest rate when the current rate is 3.5%, and it doesn't help the millions of homeowners associated with Fannie & Freddie. This is a joke of a deal. The banks are still doing business as usual, they've not tried to correct this on their own because they think they can get away with anything. Even the government MHA program only helped a very small percentage of homeowners affected by this fraud & corruption. The HOPE hotline are credit counselors, they do nothing! Fannie wants you to accept a 40 year mortgage term before they will lower your interest rate! This is not justice.