The $26 Billion Foreclosure Settlement: Who Won? Who Lost?

A consortium of the Department of Justice and the Attorneys General of every state other than Oklahoma recently announced a $26 billion settlement with the five largest new mortgage and home mortgage refinance lenders to settle claims related to improper foreclosures. Although it has been hailed as a significant victory for consumers and has been compared to the landmark $206 billion 1998 tobacco settlement, the details of the agreement paint a different picture.

Mortgage deal

Background on the Settlement

The settlement comes from a government probe of lenders’ foreclosure practices. The key milestone motivating the government to investigate was when Ally Financial, which used to be known as GMAC Mortgage, stopped foreclosing on properties in 23 different states in September of 2010 after an internal review uncovered issues with their foreclosure paperwork. Soon after Ally/GMAC did this, other major lenders including JP Morgan Chase (who bought Washington Mutual) and Bank of America (who bought Countrywide Mortgage) followed suit. By mid-October of 2010, every state attorney general in the country united with the Federal Government to create a nationwide investigation.

Their investigation found a number of shortcuts including “robo-signing” of documents, unclear chains of title, and forged documents. They also found that lenders were imposing illegal fees. As a result of the probe, the states, Feds, and lenders agreed on the $26 billion settlement package.

Participants in the Settlement

The five largest lenders in the country, Wells Fargo Mortgage, Bank of America, JP Morgan Chase, Ally Financial and Citigroup are the primary defendants in the settlement. These banks who together represent 55% of the home mortgage refinance and new home mortgage loans made in the United States are liable for the entire $26 billion settlement, although nine other, smaller banks can join by contributing around $7 billion more. As of February 15, these lenders and loan servicers remain unnamed.

The Federal Government and 49 states have all participated in the settlement. Although Oklahoma is not a part of this settlement, they negotiated a separate agreement for $18.6 million with the five lenders.

Details of the Settlement

While many people think that this means that the banks are paying $26 billion for their abuses, this is far from the truth. The five banks will pay $5 billion in cash to be split between the Feds and the 49 states, and Bank of America Mortgage will pay an additional $500 million to settle outstanding fraud claims against its Countrywide subsidiary with an additional $500 million to be paid over three years if it does not meet targets for offering selected clients forgiveness of their loans.

The $20 billion remainder of the settlement will come from “soft” money. $3 billion will be earmarked to providing home mortgage refinance loans for people with current loans. The remaining $17 billion will be earmarked to help borrowers who are both in some form of default and upside down on their loans. While the $17 billion appears to be earmarked for principal reduction, it can, in fact, be used for other purposes as well. Interestingly enough, the $17 billion will not all come from banks. Much of it will come in the form of investors receiving reduced returns on the mortgage backed securities that they bought from the banks.

Winners and Losers

At first glance, it may appear that the banks are the big winners in this settlement, given the fact that their total cash expenditure is only a little bit more than Wells Fargo’s third quarter 2011 profit of $4.06 billion. However, the settlement contains very little legal protection for banks. Many individual state lawsuits will continue proceeding, individual homeowners can still sue them, and the Federal Government can still come after them.

Consumers are not winners in this settlement, either. The $5 billion in funds for people who were improperly foreclosed upon works out to a settlement amount of around $2,000. Some pundits feel that this sets a precedent, allowing banks to subvert foreclosure law in the future knowing that they will be subject to, at worst, a $2,000 penalty. The remaining funds for loan refinances and principal reductions will be recouped by reducing the returns that investors receive. Unfortunately, those investors are, in many cases, the same customers who indirectly own pieces of the loans through their pensions, 401Ks, and insurance policies.

Given the $700 billion in negative equity outstanding in today’s mortgage market, this settlement is unlikely to make a meaningful difference in the economy as a whole. As such, it is really a victory for no one, other than the government who can claim to have done something to alleviate the problem.

Author’s Bio: Jonah Trenton, of Refinance Mortgage Rates, offers his expert analysis and views on financial and other key industry sectors. Refinance Mortgage Rates is an organization focused on creating and presenting original and accurate content and data in the mortgage, refinance and real estate markets. We strive to help, inform and educate consumers within a wide range of financial situations in a troubled economic climate.

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  1. How do I approach this if my home was sold right out from underneath me and I was not given proper notification as dictated in the law that states I must be entitled to prof when I request it. I think it is called the fair practice act or something close to that

  2. I am curious if there were any bank payouts to law firms for this law suit? Or were the state attorney generals the only legal entities in these law suits? In the tobacco law suit there were legal firm(s) that took hundreds of millions of dollars….while very little went to the state. Also, I recently saw a short sale where the Seller was “forgiven” of $200,000 of mortgage debt for his primary home and at closing given a $20,000 hardship “gift”. How do I negotiate this type of windfall gift for my other short sale Sellers. The large short sales bank gift was from Chase. Every bank has their own way to pick winners and losers? As a real estate agent, my biggest problem with the law suit, loan modification, short sales – hardship awards on short sale HUD sheets – is that there does not seem to be any consistent formula to choose who is a winner (gift of $20,000) and who is a loser (banks push Sellers into foreclosure – because they will not accept a short sale contract!) —- To the Banks: 1.Please help agents close the short sales and move this inventory of homes to people who can afford them. 2.Try to have a uniform way of doing business. Save the hardship awards of $20,000 for our military personnel, since the military expects the men and women to move every 3 years…which has caused them hardship if they cannot sell their home. 3. Do not send out $2-3000 in hardship to everyone who has lost their home. Some people committed fraud to obtain these loans. This sends a very bad message out to homeowners who purchase homes they “could”afford and continued to pay their mortgage. 4. Vet your future Buyers and do not make loans to people who cannot afford them……I recently spoke to my accountant who told me he has seem some clients of his get loans recently – that probably should not have gotten them. Let’s stop adding to the problem. Fix the problems and teach Borrowers by allowing them to have a loan after they pay their bills…the formula really is not that difficult.

  3. Thank you for the post.
    Is seems your analysis is on to something as depicted in the accompanying graphic. The reason for the rank is the third place finisher, out of the three on the podium, is the only one who didn’t take the necessary elixir known as cohesive power, a vital ingredient for the race. The power of cohesion is what the last place podium finisher needed to compete.
    The first place winner is a lock-step clot. Lots of elixir. The second place finisher might have been a little light-headed going in, but that competitor had about half of his trainers colluding with the first place winner. They spiked their guy’s elixir because they placed so many secret side bets at casinos around the nation.
    Third place has an uncomfortable feeling the race was rigged but the other two team handlers are fairly confident he or she is too weak-willed to make the charges stick.


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