After negotiating for more than a year, the nation’s biggest banks, states attorneys general and federal officials have announced the largest housing settlement ever—more than $26 billion—over foreclosure practices. The deal is expected to offer relief to more than one million U.S. homeowners who are having trouble paying their mortgages or have lost their homes to foreclosure.
The states and federal authorities have been in discussions for more than a year with banks over the “robo-signing” crisis—the practice of assigning bank employees to rapidly approve numerous foreclosures with only cursory glances at the glut of paperwork to determine if all the documents are in order.
The settlement is with five big banks: Bank of America Corp., J.P. Morgan Chase & Co., Citigroup Inc., Wells Fargo & Co., and Ally Financial Inc., the company formerly known as GMAC.
Of the $26 billion, $17 billion must be spent toward direct relief to borrowers, with a big chunk of that—60 percent—going toward principal reductions, or the write-downs of mortgage debt, as well as other kinds of loan modifications or assistance. According to reports, the amount must be spent within three years, or banks will need to make cash payments to regulators.
Under the terms of the settlement, $5 billion will go toward a reserve account for state and federal programs and to individual homeowners harmed by bank practices. Negotiators have said that about 750,000 people could receive checks for about $1,500 to $2,000.
About $3 billion will go toward helping borrowers who are current on their mortgages but have no equity in their homes to refinance into new, lower-cost loans. The program will be similar to an existing Obama administration program that seeks to help underwater homeowners.
Two key states crucial to the settlement—California and New York—had been holdouts to the deal amid round-the-clock negotiations as late as Wednesday.
According to reports, there are nine other financial institutions with mortgage servicers that are in discussions with states and federal regulators, and if they are included, the final settlement could increase by billions of dollars. If these other servicers participate, the total settlement could rise to between $30 billion and $45 billion in housing relief, reports said.
The next step is for the settlement to be filed as a judgment in federal court within a couple weeks. The court will need to approve the judgment. After that, servicers will be obligated to write a check and deposit some funds into an escrow trust that will distribute cash to federal governments and states.