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.
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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