Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Citigroup, Inc., and Ally Financial Inc. (formally GMAC) reached a $25 billion settlement last month with 49 states and the U.S. government. This settlement ends a probe of abusive foreclosure practices stemming from the collapse of the housing bubble. The U.S. Justice Department, Department of Housing and Urban Development and state Attorneys General announced the agreement on February 9th. This settlement comes after more than 16 months of investigations by state Attorneys General. The state prosecutors started the investigation of bank foreclosure practices in 2010 with the federal government joining the probe in 2011. President Obama, when making the settlement announcement, said:
We need to keep doing everything we can to help homeowners and our economy. The landmark agreement will begin to turn the page on an era of recklessness that led to the housing bubble.
The President was joined for the announcement by Attorney General Eric Holder, other administration officials and attorneys general from several states. The banks settling are the nation’s five largest mortgage servicers. With 49 state Attorneys General on board, U.S. Attorney General Eric Holder called the agreement the largest federal-state civil settlement in U.S. history. Interestingly, Oklahoma entered into a separate agreement worth $18.6 million with the banks and didn’t sign the federal settlement. All other states are on board with the settlement.
Based on what I have learned so far, I have some serious reservations about this settlement. While the amount of money sounds good, I have to wonder how the real victims will fare in both the short and long run. Hopefully, this won’t wind up being a great settlement for the banks and one that’s not so good for their victims.
The $25 billion agreement includes $1.5 billion payment to some 750,000 borrowers who lost their homes to foreclosure. About $17 billion will pay for mortgage debt forgiveness, forbearance, short sales and other assistance to homeowners. The mortgage servicers will also refinance $3 billion in refinancings to lower interest rates for homeowners. Bank of America committed as much as $11.8 billion, including a cash payment of $3.24 billion, to the settlement. The balance will be applied toward mortgage modifications, principal reductions and other benefits for borrowers. Other banks also committed funds to the settlements: Ally as much as $310 million; Citigroup $2.2 billion; JPMorgan $5.29 billion; and Wells Fargo $5.35 billion.
It was reported that the total amount of the settlement could reach $40 billion. But that depends on whether the next nine largest mortgage servicers sign on to the agreement. In a best-case scenario, if all banks participate fully, according to reports, the settlement could be worth $45 billion to homeowners and people who lost their homes to foreclosure. That remains to be seen.
The settlement comes more than a year after Attorneys General from all 50 states announced an investigation into foreclosure practices following disclosures that banks were using faulty documents and sometimes false information to seize homes. A federal website has been set up to provide information on the settlement. Interestingly, it was reported that JPMorgan, the largest U.S. bank, won’t need to set aside additional costs to cover its share of the agreement. The bank says it expects that the financial impact on results for this quarter and future periods won’t be material.
The goal was to punish banks responsible for botched foreclosures and repair damaged neighborhoods, according to HUD Secretary Shaun Donovan. Hopefully, the settlement will make the banks clean up their acts. Borrowers whose loans are owned by banks, and weren’t pooled into the highly suspect mortgage bonds, will be those most likely to benefit from the agreement. Borrowers who suffered foreclosures from the start of 2008 through 2011 will be eligible to receive payments. The actual amount of restitution to individual borrowers will depend on how many of them actually make claims. Each borrower could get between $1,500 and $2,000, according to reports, and that really doesn’t seem like very much for the banks’ victims. As I understand it, the banks must spend the money within three years or face a fine.
The settlement must be approved by a federal judge and that’s good. Prior to the settlement, California and New York had been the biggest critics of the proposal. When the Attorneys General for those states signed on, things quickly fell in place and the settlement was agreed to. Interestingly, California will get $18 billion under the settlement.
It appears that the settlement won’t release any criminal liability or grant any criminal immunity. Nor will it release any private claims by individuals or any class-action claims, according to Attorney General Holder. The claims related to the packaging of mortgage loans into securities won’t be released by the settlement, according to the website outlining the agreement. The settlement agreement establishes a monitor, Joseph A. Smith Jr., North Carolina’s top banking regulator, to track compliance with the terms of the agreement.
Many believe the conduct by the banks, which caused so many bad mortgages to be issued and so many homes to be lost, was very close to criminal. Depositions in lawsuits challenging foreclosures revealed all sorts of wrongdoing. For example, it was revealed that employees were signing affidavits containing information they didn’t personally know was true. In December 2009, a GMAC employee testified in a deposition in a foreclosure case filed in West Palm Beach, Fla., that his team of 13 people signed about 10,000 documents a month without verifying their accuracy. Some of the information used by the banks has been found to be false. The Attorneys General first began settlement talks with the five largest servicers because they held almost 60 percent of home loans.
All of the mortgage servicers, including those in this settlement, have been required by the Office of the Comptroller of the Currency (OCC) to improve their foreclosure procedures. In April 2011, the OCC announced enforcement actions against the companies for “unsafe and unsound” practices related to loan servicing and foreclosures. Attorney General Holder had this to say about bank practices:
They fueled the downward spiral of our economy and of communities nationwide. They eroded faith in our financial system. And they punished American taxpayers who have had to foot the bill for foreclosures that could have been avoided.
A most serious question remains – how good will the settlement turn out to be for persons who have already lost their homes and for those who find themselves with balances on their mortgages greatly in excess of the market value of their homes? Hopefully, this settlement will prove to be good for the American people. At first look, it definitely appears to be very good for the big banks. The court approval process must be carried out in a manner to assure that this really is a good settlement for the victims and not just for the big banks. My assessment at this juncture is that the jury is still out on this settlement.
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