Despite continued distress in the housing market and gridlock on Capitol Hill, it looks like struggling homeowners will be getting a little more help in the months ahead.
Today, Attorney General Eric Holder and Secretary of Housing and Urban Development Shaun Donovan, along with most state attorneys general, announced a $25 billion legal settlement of investigations into improper foreclosures, mortgage modification misconduct and other abuses against U.S. homeowners by mortgage servicers. The lone holdout was the state of Oklahoma, which did not join the other 49 states included in the settlement.
In exchange for resolving those cases, the nation’s top five mortgage servicers — JP Morgan Chase, Bank of America, Citibank, Ally Financial and Wells Fargo, which service about two-thirds of U.S. residential mortgages — agreed to significant concessions.
Under the settlement, servicers will provide cash for victims, fund billions of dollars in mortgage write-downs for underwater homeowners and agree to new guidelines for mortgage servicing designed to prevent future abuses.
Restitution for victims
About 750,000 homeowners affected by bank misconduct will receive compensation from a $1.5 billion fund created by the deal. Individual homeowners should receive on average $1,500 to $2,000, says Ted Gayer, a senior fellow with the Brookings Institution.
While that may not seem like a lot for people who lost their homes because of bank misconduct, homeowners are still free to try and recover more through the court system. At a press conference today, Donovan stressed that the settlement wouldn’t affect individual cases brought by homeowners.
Eligible borrowers who were foreclosed on between Jan. 1, 2008, and Dec. 31, 2011, will be notified of their right to file a compensation claim.
Fund for principal write-downs
The settlement establishes a fund of $20 billion to help struggling homeowners, including $17 billion to reduce the mortgage balances of homeowners who currently owe more than their houses are worth. Iowa Attorney General Tom Miller, one of the architects of the settlement, says the fund may result in up to $35 billion in reduced principal because officials overseeing the fund will bargain with banks to pay less than full value to reduce mortgage debt owed by distressed homeowners.
Even so, if your mortgage is owned by Fannie Mae or Freddie Mac, you may be out of luck. The funds won’t cover homeowners with mortgages held by these entities.
“The big news here is principal reduction,” Gayer says. “But in the end, it’s not going to end up being that substantial.”
Gayer says the final total of underwater equity written down will probably be $17 billion to $30 billion, a fraction of the $200 billion in troubled underwater equity in the U.S.
Officials hope the required principal reductions will provide a framework and a push for future voluntary write-downs, but Gayer says that may be unrealistic.
“It seems like (officials) are almost counting on this triggering a change of behavior, which I’d be skeptical about,” Gayer says. “Banks could have always done principal reductions before, but they haven’t for a number of reasons.”
He says banks don’t want to write down underwater mortgage balances for homeowners whom are current on their mortgages and worry that if they undertake mass write-downs for homeowners behind on their mortgages, it will encourage other homeowners to fall behind. Either way, the write-downs forced by the settlement may provide an interesting test case, Gayer says.
Of the $20 billion fund, $3 billion will be earmarked for facilitating refinancing of underwater mortgages left out of the Homeowner Affordable Refinance Program, or HARP, which only covered mortgages owned by Fannie Mae and Freddie Mac, Gayer says. That could put more money in the pockets of homeowners who previously had been unable to take advantage of historically low mortgage rates, he says.
A homeowner ‘bill of rights’
The biggest long-term effect may be new mortgage-servicing rules contained in the settlement designed to prevent the kind of foreclosure abuses that have forced thousands of Americans out of their homes since the housing crisis began. These rules apply to all mortgages serviced by the banks involved in the settlement, regardless of whether the underlying debt is owned by investors or Fannie and Freddie.
Here are some of the biggest changes.
- Robosigning is effectively outlawed under the banks’ settlement. Affidavits and sworn statements used in foreclosure proceedings must be signed by trained personnel who have reviewed documents and have real knowledge of the case.
- Mortgage servicers will have to provide homeowners a preforeclosure referral notice at least 14 days before a delinquent loan is referred to a foreclosure attorney. It must include facts supporting the servicer’s right to foreclose, a summary of the related documents entitled to the borrower, and contact information for the servicer or a HUD housing counselor. Also included is a breakdown of any efforts the banks have made to try and prevent foreclosure.
- Servicers will have new standards for how to keep track of homeowners’ information and documentation, including the payments they’ve made, to prevent improper foreclosures.
- Servicers will be required to consider mortgage modifications more carefully and will not be allowed to foreclose in the middle of the modification process, as some servicers have done in the past. They’ll also get specific standards for how to communicate with homeowners, especially if a modification is rejected.
- Mortgage servicers will have to provide a single point of contact for distressed homeowners rather than pass them off to the next available customer service representative.
- Servicers will have to implement an appeals process for homeowners denied a modification.
- Military personnel will get specific protection and disclosures to help them avoid foreclosure.
- The short sale process will undergo a number of changes, with mortgage servicers required to publicize their criteria for approving or rejecting a short sale and provide guidance to homeowners before they put their short sale home on the market.
The new rules will be overseen by Joseph Smith, North Carolina’s banking commissioner, who will monitor the settlement.
For more information on the settlement and a detailed breakdown of the rules, homeowners can go to a newly created website on the national mortgage settlement.
While the settlement is definitely aimed at helping the beleaguered housing market, it also may do double duty as a small economic booster for the Obama administration, whose economic initiatives have found little traction in Congress of late, Gayer says.
“You can think of it as a mini-stimulus,” Gayer says.