A long-awaited landmark multi-billion settlement to address foreclosure abuses by lenders was announced today, with 49 states joining the $25 billion deal in exchange for resolving civil lawsuits about misconduct in servicing home loans and pursuing faulty foreclosures.
The settlement would require banks to provide $25 billion in loan write-downs, refinancing and other borrower assistance, as well as cash penalties for the financial institutions. It also requires the lenders involved in the settlement to abide by standard servicing standards when foreclosing as well working with homeowners interested in foreclosure alternatives such as loan modifications and short sales. See the servicing standard highlights here.
The banks — led by the five largest lenders, Ally Financial, Bank of America, JPMorgan Chase and Wells Fargo — want to settle an investigation into abuses set off in 2010 by evidence that they improperly foreclosed on borrowers with only cursory examination of the mortgage documents, a practice known as “robo-signing.” Since 2007, more than 4 million borrowers have lost their homes to foreclosure, although the robo-signing controversy helped to lower the number of foreclosures in 2011.
“The settlement is not a silver bullet that will solve the foreclosure crisis, but it should help to clear the cloud of uncertainty that’s been hanging over the foreclosure process over the past 16 months, allowing lenders and servicers to more confidently move forward with delayed foreclosures when they have the proper documentation to do so as specified in the settlement,” said Daren Blomquist, RealtyTrac Vice President. “The finalized settlement should also prompt lenders and servicers to more aggressively pursue alternatives to foreclosure — such as loan modifications, short sales and deeds in lieu of foreclosure — in situations where the documentation necessary to foreclose is lacking.
“All of this will result in more foreclosure pain in the short term as some of the foreclosures that should have happened last year instead happen this year — which will likely result in higher foreclosure numbers in 2012 than 2011. We estimate there will be 1 million completed foreclosures, or REOs, in 2012, a 25 percent increase from 2011. But in the longer term a finalized settlement will help to more quickly clear the so-called shadow inventory, which will in turn help the housing market finally bottom out once and for all — provided that more roadblocks are not put up that stall the foreclosure process further.”
Over the last year, the settlement has been hamstrung by one delay after another. The biggest sticking points have been objections by the attorneys general of California and New York, who want to pursue their own investigations outside of the national settlement. California foreclosure activity has consistently accounted for 20 percent to 25 percent of the nation’s total over the past five years.
The settlement would set aside up to $17 billion specifically to pay for principal reductions and other relief for up to 1 million borrowers who owe more than their houses are currently worth. The deal would also provide checks for about $2,000 to roughly 750,000 who lost homes to foreclosure.
The settlement would apply only to privately held mortgages issued from 2008 through 2011. About 31 million loans are owned by banks. The deal is subject to the approval by a federal judge.