State and federal officials on Thursday announced a settlement of $26 billion with five of the nation’s banks over flawed and fraudulent foreclosure practices that affected several million homeowners and became commonplace after the housing boom turned to bust in recent years. It is the largest government-industry settlement in more than a decade.
The deal marks the culmination of more than 16 months of negotiation between lenders and a collection of state and federal officials. It aims to help troubled borrowers by requiring the banks to reduce the amount borrowers owe on their mortgages, lowering their interest rates and paying restitution to homeowners who suffered mortgage-related abuses. It will force lenders to revamp how they interact with struggling mortgage holders and bar them from trying to foreclose on borrowers while simultaneously negotiating mortgage modifications.
In addition, firms will have to make sure borrowers have a single point of contact with a lender, rather than being shuttled to different employees with each interaction.
U.S. Attorney General Eric H. Holder Jr. announced the deal — which he called the largest joint federal-state civil settlement in history — at a packed morning news conference attended by top federal housing and finance officials and attorneys general from many states.
Holder excoriated lenders for practices that he said “pushed borrowers into foreclosure” and “fueled the downward spiral of our economy.” He called the deal the country’s latest step forward in “righting the wrongs that led to our nation’s housing-market collapse and economic crisis.”
President Obama, in an afternoon briefing at the White House, lauded the effort that led to the settlement. “We have reached a landmark settlement with the nation’s largest banks that will speed relief to the hardest-hit homeowners, end some of the most abusive practices of the mortgage industry and begin to turn the page on an era of recklessness that has left so much damage in its wake,” Obama said while surrounded onstage by Holder and several state attorneys general. “And the bipartisan nature of this settlement and the outstanding work that these state attorneys general did is a testament to what happens when everybody is pulling in the same direction.”
Obama also reiterated his call to Congress to pass a series of measures to help struggling mortgage holders reduce their monthly payments and to stem the continuing slide in real estate prices.
Officials said the settlement — details of which can be seen on www.NationalMortgageSettlement.com — probably would be filed in a federal court within a matter of weeks and would require the consent of a judge. Once it is approved, banks would begin to deposit money into a trust account, and those funds would be distributed to qualified homeowners by the government. In all, 49 states have signed onto the agreement, with Oklahoma the lone holdout, federal officials said.
Under the terms of the deal, banks would have three years to complete principal writedowns, refinancings and other relief. But officials said they structured the deal so that it provides incentives for actions taken within the first 12 months so that the aid can get to homeowners sooner rather than later.
The settlement also includes about $17 billion that would go toward foreclosure-prevention measures, such as lowering the loan balance for borrowers who owe more than their homes are worth. Banks would be given varying “credits” for different ways in which they write off existing debts.
Other provisions would provide for lowering interest rates for homeowners who are current on their loans. In addition, as many as 750,000 borrowers who lost their homes to foreclosure since 2008 would be eligible for payouts of about $2,000 each, without surrendering the right to join future lawsuits, state officials said.
The five banks now at the heart of the settlement are Wells Fargo, Bank of America, J.P. Morgan Chase, Ally Financial and Citigroup. The banks faced a public uproar in late 2010 when it became clear that the legal paperwork they had filed in numerous foreclosures included flawed and fraudulent documentation. In many cases, because of the way in which loans were hastily packaged and sold to investors, banks had difficulty verifying ownership of the underlying mortgages.
Several Washington area housing counselors said the deal would probably do little to help their clients but that they needed to learn the details of the aid to be sure.
Cherelle Silue, manager of housing services at United Communities Against Poverty in Prince George’s County, said her first impression is that a homeowner could wind up not getting much.