The details of the settlement, however, are not entirely clear. Struggling homeowners will have many questions like how exactly will this money be distributed, what is the time frame of the payments and, finally, who is eligible to be compensated? We try to answer some of these questions here.
Details of the Settlement
The settlement came as a result of a 14 month investigation started in the fall of 2010 into the mortgage servicing industry by 49 state Attorney Generals amid uproar over revelations that banks evicted people with false or incomplete documentation. 4 million families have lost their homes to foreclosure since the start of the housing crisis in 2007 and 3.3 million more homeowners are currently undergoing or close to foreclosure.
The settlement involves mortgage servicers Bank of America, J.P. Morgan Chase, Wells Fargo, Citigroup and Ally Financial (formerly GMAC), all of whom decided to settle after being investigated for fraudulent foreclosure practices.
The amounts paid by each bank are directly connected to their market share of the mortgage servicing industry. Bank of America has the biggest share, and will provide $11.8 billion to the settlement, followed by Wells Fargo with $5.4 billion, JP Morgan Chase with $5.3 billion, Citigroup with $2.2 billion and $310 million from Ally Financial. Bank of America will also contribute an additional $1 billion for Federal Housing Administration loans.
Keep in mind that out of the $26 billion only $5 billion will be in paid out cash – the remaining $17 billion will be used to reduce the principal for homeowners how are underwater on their mortgages over a period of 3 years. It should also be pointed out that mortgages owned by the Fannie Mae and Freddie Mac are not covered, which excludes about half the nation’s mortgages from this settlement.
The often quoted $26 billion figure might even balloon to $30 billion if the government can bring nine other major mortgage servicers join the settlement – something that is currently under consideration by the government.
Who Is Eligible For Compensation and How Much Should They Expect?
The settlement money will be doled out under a complex formula created that incentivizes banks to help hardest-hit borrowers. The banks will get varying degrees of credit for different kinds of help. Banks will get more credit for things like reducing principal owed on underwater mortgages and renegotiating mortgages to help families keep their homes. They will get less credit, however, for short sales or taking losses on loans that were likely to go bad anyway.
To be eligible for the settlement homeowners must have mortgages that are owned and held by the nation’s largest mortgage servicers, i.e. the five big banks mentioned above. Benefits could range from loan modifications, principal reductions or direct payments from lenders. Remember that only homeowners in the states who joined the settlement are eligible for compensation; borrowers from Oklahoma, for example, are not be eligible for direct relief because the Oklahoma state government elected to not take part in the settlement. This table contains the complete list of which states took part in the settlement and how much each state will receive in compensation: http://www.scribd.com/webber3292/d/81077696-State-Settlement-Amounts
The banks participating in the settlement will grant homeowners with underwater mortgages $10 billion worth of principal reduction, $3 billion in refinancing and $7 billion in other forms of mortgage relief such as forbearance for unemployed borrowers. All of this will cover roughly one million borrowers in total. Another $1.5 billion will be spent on direct cash payments of $1,500 – $2,000 to around 750,000 borrowers who lost their homes to questionable foreclosure practices from 2008 to 2011. $3.5 billion will go to various state and federal governments to bolster resources for legal aid, counseling services for borrowers facing foreclosure and to help fund future investigations into mortgage-fraud.
Time Frame of the Settlement
Bureaucracy, as the saying goes, moves slowly. Under the terms of this settlement the banks will have six to nine months to determine who is eligible for relief and three years in which to distribute the aid. This is, of course, little comfort to the millions of struggling homeowners who need help right now.
Long Term Prognosis
Economists have little hope of any immediate boost to the economy from this settlement partly because it affects comparatively so few people (just under 2 million), and the repayment terms are stretched out over 3 years. There is hope, however, that the settlement will have a positive effect in the long term.
Homeowners not directly eligible to get help from this settlement might still see benefits in the form of reduced foreclosure rates in their area, stabilized home values and powerful new mortgage servicing standards and consumer protections. This settlement is the first step in the federal government’s multi-year fight to hold the big banks accountable for their actions leading up to and during the financial crisis.
The banks involved in the settlement could still be liable to further criminal prosecution related to the housing crisis as well as private lawsuits. From now on banks and other mortgage servicers will have to adhere to tougher standards for servicing loans and executing foreclosures.
California has been hit harder than most by the foreclosure crisis. A disproportionate number of housing loans in the state are either delinquent or exceed the value of the underlying property. In recognition of the extraordinary hardship faced by homeowners in California, the state will get $16 billion of the $26 billion settlement – the largest share of all 49 States.
If you had any questions about your mortgage or wanted to see if you qualify for this settlement, contact Team Aguilar today!
For more information on the settlement please visit: http://www.nationalmortgagesettlement.com/faq
Image sources: http://www.scribd.com/webber3292/d/81059707-Settlement-Graphic