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The Banking Crisis


Mortgage deal is broadest action taken in foreclosure crisis

By Julie Schmit and Paul Davidson, USA TODAY

For almost 1 million homeowners, the $25 billion federal-state mortgage settlement announced Thursday may be like winning a lottery.

Their mortgage debt will be cut by thousands of dollars in the broadest effort yet to help borrowers struggling to make payments on homes that have plunged in value the past five years.

Given that homeowners owe an estimated $700 billion more on their homes than they’re worth, much more will be needed to strike a serious blow at the foreclosure crisis, housing experts say.

They also warn that the historic deal will have a limited impact on the housing market. Prices are still falling in much of the U.S. despite a 33% drop since late 2006.

“This will make a dent in the foreclosure crisis, but it’s not going to stop it,” says Alan White, mortgage lending expert at the Valparaiso University School of Law.

The settlement also gives little immediate relief to the majority of U.S. homeowners who are current on their home payments, and even less relief for homeowners who’ll likely never end up with a distressed loan.

President Obama and other officials were quick to note Thursday that the settlement is no cure-all, but it does mark the most concrete action taken to date to compensate homeowners for past mortgage servicing and foreclosure abuses. Lenders have three years to fulfill their obligations under the settlement and receive incentives to provide relief within 12 months.

The accord also creates a testing ground for whether principal reduction can actually reduce default rates and, if successful, the settlement may drive more principal reduction, supporters say.

“This agreement is the only way we’re going to get to substantial principal reduction,” says Tom Miller, the Iowa attorney general who helped lead the settlement efforts along with other state attorneys general and federal officials.

The deal shows that “we can still get big things done in this country,” said Shaun Donovan, secretary of Housing and Urban Development.

The settlement — the largest involving a single industry since the 1998 multistate tobacco deal — covers five major mortgage servicers: Bank of America, Wells Fargo, JPMorgan Chase, Citibank and Ally Financial.

Federal officials said Thursday that the deal’s value could grow to $30 billion if nine more servicers sign on. Negotiations are underway with some of them.

As it is, the deal includes $5 billion in cash and $20 billion in loan modifications that the five servicers will make — mostly for borrowers who’re delinquent on loans and underwater on their homes, meaning they owe more on their homes than they’re worth.

California and Florida, two big states devastated by foreclosures, will get the largest share of the money, followed by Arizona, Illinois and Nevada, Donovan said.

Bank of America, the largest servicer, will be responsible for $11.8 billion of the $25 billion deal. Wells and JPMorgan Chase: $5.3 billion each. Citigroup, $2.2 billion and Ally, $310 million.

Oklahoma has separate settlement

Oklahoma is the only state that didn’t sign on to the settlement. Its housing market didn’t suffer as badly as most others. Oklahoma Attorney General Scott Pruitt criticized the national deal, saying it goes too far and rewards homeowners who stopped paying their mortgages over those who continued to make payments.

Instead, Oklahoma announced a separate settlement that requires the five banks to pay the state $18.6 million, largely for homeowners victimized by deceptive foreclosure practices.

For the other 49 states, the five servicers will provide $17 billion in mortgage relief, including principal reduction, to about 1 million homeowners, Donovan says.

An additional $3 billion will go to refinance borrowers who are current on their payments into loans at 5.25%. That’s far above existing interest rates of about 4% but “is still a good rate,” Miller says.

Up to 750,000 other borrowers could receive restitution averaging $1,500 to $2,000 if they lost homes to foreclosure from 2008 through the end of 2011, Donovan says.

The reductions in loan principal are expected to account for at least 60% of the $17 billion pot. By writing down principal, officials hope fewer people will eventually default on their loans.

That $17 billion could result in $32 billion in actual mortgage relief, officials say. That’s because the settlement includes formulas that give banks differing amounts of credit depending on which loans they write down.

To qualify for a reduction in principal, borrowers will generally need to be delinquent on their mortgages or at risk of imminent default and owe more on their homes than they’re worth.

Most of the write-downs are expected to occur on loans that the five servicers own themselves. No Freddie Mac, Fannie Mae or Federal Housing Administration loans will be eligible. They account for 56% of existing loans, says Inside Mortgage Finance.

The size of the principal write-downs will vary by borrower. If 1 million homeowners get them, they’d average about $20,000. But write-downs are likely to be larger in many cases, especially in higher-cost states where homeowners are deeply underwater.

Many economists estimate that at least $25 billion in principal reduction is needed to do more than just dent the foreclosure crisis, professor White says.

Principal reduction is ultimately the only way this crisis will end,” says Dean Gould, lecturer at the University of Michigan Law School and an expert in real estate law. The $10 billion “is not enough. There has to be a sustained program of principal reduction for this to work.”

Whether that happens will largely depend on whether Freddie Mac and Fannie Mae do principal reduction. The government-backed entities guarantee or own almost half of all home loans. Their federal regulator has opposed principal reduction, saying that it hasn’t been shown to be more effective in reducing defaults than other loan-modification efforts.

“Freddie and Fannie is the other shoe that has to drop,” White says. “If this works and Freddie and Fannie follow suit, we could begin to see an end to the foreclosure crisis.”

Nationwide, more than 11 million U.S. homeowners owe more on their homes than they’re worth, market researcher CoreLogic says. Almost 4 million loans are in foreclosure or seriously delinquent, says LPS Applied Analytics.

If the settlement takes just 500,000 homes out of the foreclosure process, it “will be sufficient to get home prices moving north again,” says Mark Zandi, chief economist of Moody’s Analytics.

But economist Paul Diggle of Capital Economics calls the $10 billion in principal reduction a “drop in the ocean.”

He says the settlement “will help at the margins,” but that it won’t turn the “fragile housing recovery that appears to be underway into a significant and sustained one.”

The settlement could drive home prices lower, says Stan Humphries, Zillow economist. Now that the deal is done, mortgage servicers are likely to pick up the pace to liquidate homes that have been lingering in the foreclosure process, he says.

Instead of home prices going up this year, Zillow predicts they will drop almost 4%.

Robo-signing scandal’s epilogue

The nationwide settlement stems from abuses that occurred after the housing bubble burst. A federal probe in 2010 found widespread abuses of foreclosure practices. Many companies that process foreclosures failed to verify documents. Some employees signed papers they hadn’t read or used fake signatures to speed foreclosures — an action known as robo-signing.

As part of that 2010 probe, federal banking regulators are doing their own review of foreclosure cases that’s expected to result in payouts to borrowers who were harmed.

Those regulators on Thursday announced that they fined the same five servicers $1.2 billion for their servicing misdeeds but that the fines are included in the $25 billion settlement.

“Everyone gets their comeuppance,” says Roy Oppenheim, a Fort Lauderdale attorney who has represented more than 1,000 foreclosure victims.

While the servicers will get protections from some lawsuits in exchange for the settlement, disgruntled borrowers could still sue individually or as part of a class action.

Beyond the financial penalties, the settlement mandates a new code of conduct for how servicers treat distressed borrowers.

The new standards “move the ball significantly forward,” says Alys Cohen of the National Consumer Law Center. “But much will depend on how (the agreement) is carried out.”

A monitor will oversee the settlement.

Lenders that violate it could face penalties of $1 million per violation.

‘Dual-tracking’ targeted

The new standards are expected to restrict one practice that has long been criticized, known as “dual tracking.” That’s where servicers proceed with a foreclosure while a borrower is pursuing a loan modification.

The accord won’t ban that, but it would prevent servicers from completing a foreclosure sale of a home if a modification is being considered.

Other improvements will require that:

•Homeowners be reviewed for loan modifications before the foreclosure process starts. “That’s a game changer,” Cohen says.

•Borrowers be told why they’re denied a loan modification. Many have complained that they never understood why they were denied.

•Homeowners in default be charged no more than once in 12 months for property valuations or appraisals, which can cost hundreds of dollars.

•Servicers make more attempts to keep up homeowner insurance policies on delinquent loans so borrowers don’t later get stuck with higher-priced policies.

•Parties that attempt to foreclose show they have legal authority to do so and do the foreclosures properly.

“The goal here is to stop the abuses from happening again,” Cohen says


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