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Breaking News: Banks, States Reach $26 Billion Foreclosure Settlement in Largest-ever Housing Deal

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Mortgage Bankers Association says deal can help consumer confidence and stabilize markets

(RISMedia/MCT)— After more than a year of negotiations, the nation’s biggest banks, states attorneys general and federal officials have announced the largest housing settlement ever—more than $26 billion—over foreclosure practices. The deal is expected to offer relief to more than one million U.S. homeowners who are having trouble paying their mortgages or have lost their homes to foreclosure.

The states and federal authorities have been in discussions for more than a year with banks over the “robo-signing” crisis—the practice of assigning bank employees to rapidly approve numerous foreclosures with only cursory glances at the glut of paperwork to determine if all the documents are in order.

The settlement is with five big banks: Bank of America Corp., J.P. Morgan Chase & Co., Citigroup Inc., Wells Fargo & Co., and Ally Financial Inc., the company formerly known as GMAC.

Of the $26 billion, $17 billion must be spent toward direct relief to borrowers, with a big chunk of that—60%—going toward principal reductions, or the write-downs of mortgage debt, as well as other kinds of loan modifications or assistance.

Under the terms of the settlement, $5 billion will go toward a reserve account for state and federal programs and to individual homeowners harmed by bank practices. Negotiators have said that about 750,000 people could receive checks for about $1,500 to $2,000.

About $3 billion will go toward helping borrowers who are current on their mortgages but have no equity in their homes to refinance into new, lower-cost loans. The program will be similar to an existing Obama administration program that seeks to help underwater homeowners.

The massive effort, more than a year in the making, is the most recent government attempt to boost the limping housing market and help people whose homes lost significant value in the housing crash.

It was also announced Thursday that the government will resolve its claims against Bank of America, Countrywide Financial Corporation and certain Countrywide subsidiaries and affiliates for underwriting and origination mortgage fraud. As part of the settlement, Bank of America will pay $1 billion to resolve the wrongdoing uncovered during the office’s investigation.

In that settlement, it will entail an immediate payment of $500 million to provide a recovery for the harm done to the FHA by Countrywide’s conduct. Payment of the second $500 million will be deferred to fund a loan modification program for Countrywide borrowers across the nation with underwater mortgages. Under the terms of the program, Bank of America will solicit all potentially eligible borrowers and provide a loan modification to anyone with an eligible mortgage who accepts the offer. If, after the expiration of three years, the bank has not met its obligation to apply the full $500 million to provide such relief, any remainder will be paid back to the government.

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Industry Reaction Mixed

Leading real estate brokers and housing industry officials presented a full range of responses to the news today, from praise that the settlement is a positive step in the right direction to cautions that it will not resolve all the industry’s problems to even aopposing the move as hurtful to the housing industry.

Said David H. Stevens, President and CEO of the Mortgage Bankers Association (MBA), “A final agreement can play an important role stabilizing and providing certainty and confidence to the housing and mortgage markets. With all the rumors and speculation surrounding these negotiations behind us, it is now imperative that policymakers, lenders, servicers and other stakeholders work together on policies and initiatives that will allow us to get the housing market on the road to recovery.”

He continued, “I would caution, though, that, while a positive step, this will not be a panacea for all that ails housing. There are a number of other issues that we need to resolve. This includes striking the appropriate balance between consumer protection and access to affordable credit for qualified borrowers in the QM and QRM rulemakings, and facilitating the return of private capital to the mortgage market by comprehensively addressing the future of the GSEs and the government’s role in the secondary market.”

Peter Hunt, president and CEO of Hunt Real Estate ERA, and a member of RISMedia’s Real Estate Information Network® (RREIN), said,  “I don’t believe that the settlement will in and of itself solve the significant problems in the entire housing market. Some markets have already gone a long way toward self-correction and lenders all across the country are slowly getting on board with realistic means to deal with ‘short-sale’ situations to avoid even larger losses from foreclosures. Investors have also moved in to soak up a good portion of the toxic inventory in many parts of the country.”

Hunt, whose brokerage serves the Buffalo/Albany/Syracuse/Rochester, N.Y. and Phoenix, Ariz. markets, continued: “People “underwater” will only stay in their homes and continue to pay on their mortgages as promised if they believe that there is some relief in sight either through some write-down of the principal balance owing in the short run and/or they have a fundamental belief that the dynamics in the local housing market and their own confidence in their job security indicate that their home values have a chance of appreciating.”

Bill Plattos, executive vice president and broker of First Team Real Estate in Irvine, California, also a member of RREIN, took an opposing view of the settlement, stating, “I do not know all of the details behind the settlement but I do not see how homeowners who are not making payments, taking no responsibility, put nothing down, etc., are going to be rewarded because the government in my opinion wants to look like they are taking no responsibility and just making the banks the sole bad guys.”

He continued: “I would rather they work with the banks and help buyers with reasonable credit qualifications obtain loans at all price ranges. I am tired of the government—state or federal—constantly trying to hold the banks responsible with what I believe are more lawsuits coming, making themselves look good at the expense of us all. This does not help housing.”

Richard Green, the director of  the Lusk Center for Real Estate at the University of Southern California also was not impressed with the outcome.

“I really don’t see this as being that big a deal,” he said. “In reality, the total number of dollars is still small compared to the value of the mortgages that are underwater. To some extent, the numbers reflect losses the lenders would have taken anyway. As a result, the net impact is probably not as large as they are saying.”

Tense Last Minute Negotiations

Two key states were crucial to the settlement—California and New York—which had been holdouts to the deal amid round-the-clock negotiations as late as Wednesday. Showing how much the situation was in flux, government officials were making arrangements late into the evening Wednesday for a flurry of announcements Thursday and a planned briefing by federal officials for reporters late Wednesday night was canceled amid last-minute negotiations.

Negotiators with the office of California’s attorney general have spent much of the week in negotiations with major mortgage servicers. California’s assent was key because it increased the size of the settlement to $26 billion from $19 billion without the state.

One big hurdle has been California’s concern that the deal would release the large servicers from legal action, including violations of state laws, for issues that had not been thoroughly investigated, including securities probes related to losses sustained by the California Public Employees’ Retirement System, the nation’s largest public pension fund.

California Attorney General Kamala D. Harris left the settlement talks in September, saying banks weren’t providing enough money for California homeowners and were asking for too much legal forgiveness. After California stepped away, the release from legal claims for the servicers was broadened to include issues related to the origination of mortgages. Harris wants to retain the ability to get restitution for such claims, particularly regarding predatory lending.

Language over the degree of the release from legal claims remained a big issue of contention for California on Wednesday night, a person familiar with the negotiations said.

In New York, the settlement has been complicated by state Attorney General Eric Schneiderman’s recent lawsuit against three of the banks in the discussions — Bank of America, Wells Fargo and Chase—alleging that their use of an electronic database has resulted in widespread deception and fraudulent foreclosure practices, according to a person familiar with the matter.

Schneiderman, who has been one of the most vocal critics of the talks, has said that a multi-state foreclosure settlement could shut down his own investigations into mortgage misdeeds of Wall Street leading up to the financial crisis.

According to reports Thursday after the official announcement, regulators said that the deal does not relieve banks from various Securities and Exchange Commission claims or certain claims that the new Consumer Financial Protection Bureau might have against the banks. It also does not block the states and other regulators from pursuing claims on issues associated with the problems with the securitization or origination of mortgages.

Of his state’s attorney general’s efforts to investigate housing fraud in New York, Hunt noted, “Mr. Schneiderman can only deal with issues within the context of New York State, which includes Wall Street and many bank headquarters. In this drama, the blame goes well beyond the banks—to the ratings agencies, Congress, Fannie Mae, Freddie Mac, at least three Administrations, not to mention the investment banks. There is plenty to investigate that will go far beyond the scope of this settlement and Mr. Schneiderman’s suits.”

LP Finn, operating officer of Northport, New York’s Coach Realtors on Long Island, also a RREIN member, praised the deal, noting that while the settlement will not fix all the housing problems, it’s an important step in the right direction toward turning the housing crisis around and will help struggling homeowners in his company’s markets.

“More than 40,000 families in New York State will directly benefit from this settlement,” Finn said. “Mr. Schneiderman and the other state attorney generals should be commended on their efforts to stabilize a section of the U.S. housing market. While this settlement will not correct the housing market, the lives of many troubled borrowers will be improved.”

On Thursday afternoon, Housing and Urban Development Secretary Shaun Donovan held a media conference, in which he discussed the servicing settlement.

Donovan noted that this historic settlement is the most significant effort we have seen thus far in the financial crisis, and he stated that holding those banks accountable whose irresponsible behavior led to the crisis will have a huge impact.

Donovan continued to state that this move is critically focused on ensuring homeowners who have been wronged by abuses are able to benefit as well. “Roughly 1 million homeowners will be able to benefit from principal reductions of their loans, and from refinancing.” Donovan then went on to discuss how neighborhoods will also benefit, as homes that have been left vacant will be purchased and renovated, so property values will increase.

“I believe, and the president believes, that this settlement is perfect example of how when we set aside party politics and geographical differences and come together to do the right thing for country, and for families suffering, we can still get things done in this country.”

According to reports, there are nine other financial institutions with mortgage servicers that are in discussions with states and federal regulators, and if they are included, the final settlement could increase by billions of dollars. If these other servicers participate, the total settlement could rise to between $30 billion and $45 billion in housing relief, reports said.

The next step is for the settlement to be filed as a judgment in federal court within a couple weeks. The court will need to approve the judgment. After that, servicers will be obligated to write a check and deposit some funds into an escrow trust that will distribute cash to federal governments and states.

Beth McGuire and Zoe Eisenberg contributed to this report. MCT portions of this story were written by Alejandro Lazo of the Los Angeles Times and distributed by MCT Information Services.

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