Is $25 Billion Enough to Cure the Mortgage Crisis?


By Stephanie Stewart
On January 23, 2012, state attorneys general from across the country received the draft of a proposed $25 billion settlement agreement with the nation’s largest banks that would substantially restructure foreclosure and mortgage services practices.  The five lenders – Bank of America, JPMorgan Chase, Wells Fargo, Citibank, and Ally Financial – have all agreed to the settlement, which comes in the wake of the multi-year investigation into the foreclosure practices of these institutions.  The investigation revealed that several of these banks were engaging in “robo-signing,” a practice in which bank employees sign documents they have not read or use false signatures to sign off on foreclosures.  Many of the companies that processed these mortgages then failed to verify the information on the foreclosure documents.  These practices have forced literally hundreds of thousands of people from their homes.  Indeed, nearly 8 million people have faced foreclosure since the housing bubble burst.

Under the proposed settlement agreement, mortgage lending guidelines would be reshaped to make it easier for those at risk of foreclosure to restructure their loans.  Seventeen billion dollars would go toward reducing the principal on some home loans, such that roughly one million homeowners could see their mortgages reduced by an average of $20,000.  Five billion dollars would also be placed in a reserve account for various state and federal programs, and the remaining $3 billion would go to help some homeowners refinance at 5.25%.  This refinancing would be available even to those who owe more on their homes then what they are worth.  The settlement would only apply to privately held mortgages issued between 2008 and 2011, and it would not apply to mortgages held by government-controlled Fannie Mae or Freddie Mac.
If approved, the deal would be the largest settlement within a single industry since the states sued the tobacco companies in 1998.  It would also set more stringent servicing standards for the entire mortgage industry.  Despite this, many states have concerns about the effectiveness of the proposed agreement.  The plan to reduce the principal amount of the loan, for instance, has been criticized because principal reductions have not been shown to lower the risk of homeowners defaulting on their loans.
Under the proposed agreement, about 750,000 affected homeowners will receive a check for $1,800 in compensation for the alleged deceptive practices.  There is a concern by some states that this is wholly inadequate.  Then, too, several states do not want the settlement to shield or release the banks from criminal or civil liability, and there are some states which would like to continue their investigation of potentially illegal foreclosure practices.  In the end, it may be left to each individual state to decide whether it will join in the settlement or pursue its independent investigation and remedies.
The agreement could be approved in the next few weeks, and if it is, the hope is that the log jam in the real estate market will finally begin to loosen up.