Mortgage Plan to Help Homeowners – $26 Billion Settlement with Big Banks


If you’re wondering when help will arrive for your underwater home, on February 9th, 2012, a giant step forward was taken on your behalf.

The Obama Administration announced a settlement with five of the largest banks, Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial, and attorneys general in all states with the exception of Oklahoma.

The $26 billion foreclosure settlement brings to a close the litigation surrounding the use of robo-signing in the foreclosure process and may provide much needed relief for many of the nation’s underwater homeowners.

Background


In the Fall of 2010, reports started to emerge about the behind the scenes process used to foreclose properties that underwater homeowners either walked away from or due to financial situations, could no longer make payments.

If you have ever purchased or sold a home, you know that the process of transferring ownership is a complicated legal endeavor that has to be done exactly as state laws dictate.  The person signing the documents has to have knowledge of what they’re signing and when the documents are signed, a notary is supposed to witness the signature.  As part of documents being signed, some states require that the signer swear that they have knowledge of the foreclosure case.

It was later found out through depositions of reported robo-signers that not only had they not read the documents they were signing, they had no knowledge of the case and often, the notary was not a witness to the signature.  Instead, they either pre- or post-notarized the documents without witnessing the signing.

This led to a large scale halt of foreclosures further hampering the real estate recovery as homes sat in legal limbo not able to be foreclosed or refinanced.

The Settlement

Mortgage settlement

The new big-bank mortgage settlement can potentially help up to 2 million homeowners.

The February 9th settlement between the attorneys general and the five largest mortgage lenders finally brings the case to a close and within the settlement, there are some customer friendly provisions.

First, $17 billion of the funds will go towards principal reduction for up to 1 million homeowners.  According to the New York Times, the average homeowner is underwater by more than $50,000, far more than a $17,000 average payout if the funds were distributed evenly.  Because of this, the fund will likely not provide relief for the 1 million people but for those who receive reduction, this may allow the home to be sold or refinanced.

Next, up to 750,000 other homeowners may be eligible for refinancing.  The settlement earmarked $3 billion that would make up for the losses that banks would face by refinancing these homeowners’ mortgages.  Although no principal reduction would take place for these loans, refinancing at today’s record low rates could drastically reduce their payment.

Another $1.5 billion of the settlement will go towards providing relief for those who were victims of robo-signers.  Those affected would receive up to a $2,000 one time payment that would not take away their right to sue the lenders if they chose to in the future.

The Impact of the Settlement

Although the deal was announced today, other lenders may join in the settlement raising the $26 billion settlement much higher providing relief for even more homeowners, but the Obama Administration was quick to say that this would not provide relief to all Americans.

Mortgages held by Fannie Mae and Freddie Mac will not receive any relief under this settlement leaving more than half of all mortgage holders in the same positions they were in before the settlement was announced.

Still, housing experts believe that even if more foreclosures take place as a result of settling the lawsuit, that may be good for the market.  As long as homes are vacant and homeowners can’t get out from under their home, there is little hope for a recovery.

This settlement provides the first steps in removing the gridlock present in the real estate market.

What do you think of the bank mortgage settlement?

sources:
http://www.nytimes.com/2012/02/10/business/states-negotiate-26-billion-agreement-for-homeowners.html
http://money.cnn.com/2012/02/09/news/economy/mortgage_settlement/index.htm
http://www.justice.gov/opa/pr/2012/February/12-ag-186.html

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Published or updated March 30, 2013.

Comments

  1. I think this is very interesting. Do you know what the rules are for homeowners being able to do this?

  2. Hunter - Financially Consumed says:

    This initiative is a political joke. Homeowners will not see any relief for years. Anyone that could really use the help would have had their home forclosed upon by then.

    It’s odd that Fannie and Freddie borrowers are not included in this plan. Surely the Government has more control over these institutions than public banks?

    I can’t help but be skeptical and critical about what is transpiring here.

    • It is amazing that my tax dollars go more to help those that didn’t do it right and are in trouble than for those who did do it right and have no relief. Something is backwards in our society…

      I am more than $65K upside down…made every payment without so much as a hiccup for the past 6 years. Now that I am hurting I contacted my lender to see if I could refinance to a lower interest rate but was told if I bring $60K to the table they will talk to me. My lender was B of A, go figure! I am only asking the back to lower my interest rate not forgive anything else because I believe in being responsible for my debt. But becasue I am part of Fannie Mae I am exempt from any program assistance while I watch others benefit. Life is not fair and I get that, but when I did ‘everything’ right, put thousands down on my home, never took out money when I had the chance to take 125% of the value, and never missed a payment, but all the benefits and favors now go to those that didn’t really do it correctly? It’s just wrong!!! You will now see another wave of people walking away fome their homes and here is why.

      According to market trends in a typically market [I am in Phoenix] historically, home prices increase in value about 2% to 3% each year on average. Do the math for your situation. For my situation it will take more than 10 to 15 years to even reach a “break-even” point to sell my home. So why would you contiue to pay a mortgage (where many in your neighborhood got relief) when you will still owe more than your home is worth at that time? Was this a bad business decision when I bought…I think not! It was all the other factors that affected my situation. Ask any business savy person, and they would tell you cut your losses as you have the ability to turn that bad investment around in less than 10 years.

      Thanks Obama, for perpetuating this situation with bad decisions and not forcing Fannie Mae and Freddie Mac to also participate. We as tax payers own them but they have their own rules. Had you let those fail that didn’t do it right and provided and interest reset early on for those who did do it correctly, we would not likely be where we are today with the housing market in those areas most affected. The market would have atleast moved forward not backwards as my home value continues to do as of today!

  3. Obviously this settlement is insufficient if it is only helping less than half of all mortgage holders. Hopefully there is more help on the way for everyone else.

    • How do you mean help for everyone? While there are a lot of people who were hurt by the mortgage risk that banks/investment firms took, not all mortgage holders are hurting.

      It’s a hard thing since there are those who really are in a bad way but how do we determine who exactly is hurting because of banks vs hurting due to their own risk?

  4. Although I may disagree with the amount of the settlement, I do like the fact that the bankers are paying for their bad policies. I would like to see Wall Street pay for their bad practices too.

    • It took long enough for some repercussions on the part of banks, didn’t it? When I think of it, we bailed out the banks and now that they are making money we hit them with a fee.

  5. How can I get my free money? Oh that’s right I forgot.. I played by the rules and instead getting punished for being prudent with my real estate holdings.

    • No kidding! I can’t stand when these crooks get bailed out. There should be a reward for living frugal and within your means.

    • I hear you. Those who have been doing the right thing sit back and watch their tax money go bail out all sorts. Do we let those swindled by banks or hurt by the banks’ risk simply get foreclosed on? That doesn’t seem entirely right. But it’s difficult to separate those who were pushed into bad loans from those who took on the risk.

      One way those who have been playing by the book, so to speak, benefit is from low interest rates and low housing prices. If you are looking for a home now or want to refinance, this is a great time.

      • My argument is no one is forced to do anything. A banker didn’t put a gun to a homeowner’s head to take the loan. The biggest issue IMHO is lack of understanding of finance, not bankers themselves per-se.

        Also we had banks that were “too big to fail” which then became even bigger after this episode. Now they are even bigger risks. Crony capitalism at it’s best!

        Without moral hazard everyone gets the idea someone else will take care of it. There has to be consequences for stupidity. Not just for homeowners but everyone. Individual responsibility has gone out the window and my fear will never return.

        • I can’t disagree, really. ‘Bailout’ is the word du-jour. Everywhere you turn something is getting bailed out. We have whole countries getting bailed out these days. And those who don’t need bailouts sit by and watch their savings interest go to zero and their stocks stay flat (and that’s a good scenario for many).

          Though a banker isn’t putting a gun to a home-buyer’s head, they may very well have been pushing them towards a loan that made no sense for them. ‘Buyer beware’ certainly comes to mind for sure. But the incentive for lenders was to get as many loans as possible since the risk was getting sold off elsewhere.

          I’m willing to bet that many buyers had big eyes and when they heard they could get even more home than they thought they jumped at the opportunity.

          I don’t agree with giving money out to anyone who needs it, but why should banks and car companies be the only ones who are privileged enough to not fail?

          It’s a mess.

        • no they did not put a gun to a homeowners head . what they put to the people was a contract for all the chash that they wanted barrow. thats what the banks did, because they planned this in secret because they thought that they were going to make a lot of chash by refinancing all these loans but it got out of control ‘ so i say the banks created all of this bad economi, no jobs ,closed businesses. people lost equity, people paid cash for their homes and now are woth half so a said yes thisis their mess

  6. Here’s to hoping there’s some punch with this bill. It’s a bit late, though, considering the crisis started 5 years ago.

  7. I have heard from some homeowners that their mortgages with BofA have been sold to other companies who are not associated with this case. This is a way of BofA of avoiding their responsibility. Also, Governors of WI and OH are planning on using the funds for other issues and not for the homeowners impacted by this in their states. Is this illegal in any way? OH governor plans on using funs to clean up foreclosed homes….doesn’t that mean the money goes BACK to the offenders??

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