As you may have heard, five of the US’ biggest banks (Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial) have settled with the state attorneys general resulting in approximately $25 billion dollars in monetary sanctions and relief. This is the largest financial settlement by the attorney general with the exception of the 1998 Master Tobacco Settlement.
This comes after ten months of negotiations between the five banks and a coalition of state attorneys general, Department of Justice, Department of Treasury and Department of Housing and Urban Development. You may remember that all foreclosures were put on hold back in the fall of 2010. At that time, banks were exposed of “robo-signing” affidavits in foreclosure proceedings. There were other issues as well, such as deceptive practices in the offering of loan modifications (for example, leading the customer to believe that a loan modification was imminent, but proceeding with foreclosure).
The negotiations focused on “robo-signing” and mortgage servicing misconduct. The goal of the attorney general was:
- Provide immediate relief to enable struggling homeowners to avoid foreclosure
- Penalize the banks that conducted “robo-signing”
- Bring needed reform to the mortgage servicing industry
- Ensure that foreclosures are lawfully conducted
The settlement was broken down into seven key terms:
- Relief for Struggling Homeowners:
- Refinancing of Underwater Homes:
- Mortgage Servicing Reforms:
- Monitoring and Enforcement:
- Payments for Foreclosure Victims:
- Payments to the States:
- Release of Claims:
This requires the banks to allocate $17 billion to help homeowners stay in their homes. They will do this by a number of methods: Waiving of deficiency balances, unemployed payment forbearance and facilitations of short sales, to name a few. The largest program (60 percent of the $17 billion budget) must be used to reduce the principal balance of home loans for borrowers who are in default or at risk of default. Many homeowners, particularly in the sand states (Florida, Arizona, Nevada and California), have negative equity in their homes and can’t realistically refinance or sell their home. Principal reductions will allow for lower payments and give homeowners an opportunity to keep their homes.
This program must offer homeowners who are not delinquent on their loans, but cannot refinance because of negative equity the opportunity to do so. This program total is $3 billion. The banks will be contacting those that are eligible. To be eligible, a homeowner must be current on their existing loan, have a LTV (loan to value) ratio over 100%, an interest rate over 5.25% and must result in at least $100 reduction in the monthly payment.
This is a large part of the settlement. There will be new standards put in place that will prevent behavior such as “robo-signing” and other improper foreclosure practices. You can see a full list of the standards at http://www.nationalmortgagesettlement.com/. The standards include: A requirement that banks offer loss mitigation alternatives to borrowers before moving forward on to foreclosures. They must increase transparency of the process and create a dual tracking process so that a foreclosure isn’t initiated if the borrower is in the middle of a loss mitigation process (such as a short sale).
A Monitor will be set up to oversee the banks’ performance. The Monitor will also make sure the banks stay in compliance and issue reports to the attorneys general. Compliance will be enforced through the Civil Court process. Civil penalties can be assessed for violations. These violations can be subject to penalties of up to $5 million.
About $1.5 billion will be used to compensate borrowers that were foreclosed on after January 1, 2008. These funds will go to borrowers who were not properly offered loss mitigation or were improperly foreclosed on. The borrowers must be notified of their right to file a claim. The expectation of approximately $2000 per borrower will be the uniform payment.
$2.5 billion will be paid to the participating states. These funds will be distributed by the attorneys general to a variety of counseling and assistance programs. A portion of the funds could also be used as penalties for “robo-singing” violations.
The proposed release contains a broad release for the banks (for more detail, visit the above website). The release does not affect the rights of any individuals or entities to pursue their own claims for relief.
– Diana Hill firstname.lastname@example.org