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Refis and write-downs for some

By Polyana da Costa · Bankrate.com
Wednesday, January 25, 2012
Posted: 1 pm ET

A $25 billion settlement agreement between regulators and five major banks could bring some -- but not enough -- relief to struggling borrowers.

A draft of the settlement was completed this week but has not been approved yet. According to an Associated Press report, this is what the settlement could look like:

  • The settlement would provide $17 billion to reduce the mortgage balance of homeowners who are underwater -- this would likely not apply to loans owned by Fannie Mae and Freddie Mac. Why? I'll tell you in a second.
  • Up to 750,000 homeowners who were impacted by deceptive foreclosure practices would receive checks for about $1,800.
  • About $3 billion would be spent on helping homeowners refinance at 5.25 percent, even though the current mortgage rate on a 30-year-fixed loan is about 4.18 percent.

The deal would also require the banks to end robo-signing, end servicing abuses and offer sustainable loan modifications, according to the Center for Responsible Lending. Yes, that's very broad and lenders have already been told to follow the rules more than a year ago. It is hoped the final settlement has details about actually enforcing the rules in the agreement.

Back to why this deal only helps a limited number of borrowers. Edward DeMarco, acting director of the Federal Housing Finance Agency, or FHFA, says Fannie and Freddie will not allow principal write-downs. He claims taxpayers would be stuck with a $100 billion tab if the entities reduced the balances on the 3 million underwater loans they own or guarantee (which is about 10 percent of all of their loans).

Just as a reminder, taxpayers bailed out Fannie and Freddie with more than $150 billion three years ago. And I have yet to meet a struggling homeowner who benefited from the bailout.

Follow me on Twitter @Polyanad.

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