Settlement is Punishment for Banks' Abusive and Illegal Practices
After more than a year of negotiations, five of the nation's largest mortgage providers agreed last week to pay $25 billion after investigations by the Department of Justice, state attorneys-general and state regulators revealed widespread abuse and fraudulent practices that led in part to the meltdown of the housing market.
This is the largest federal-state civil settlement in U.S. history and sets the stage for the Obama Administration, through the federal government, to put in place safeguards to ensure that consumers and homeowners are protected going forward, said U.S. Secretary of Housing and Urban Development Shaun Donovan in a conference call on Thursday, Feb. 9.
Donovan spoke at length about the effects of the mortgage loan servicing and foreclosure abuses on blacks, Latinos and other minorities.
"This comes not a moment too soon for homeowners, the housing market and so many African Americans, the Latino and minority communities and for our economy more broadly," Donovan said. "We all know how the housing bubble burst, how lenders sold home loans to consumers who couldn't afford them and how they packaged those loans to make profits that turned out to be nothing more than a mirage."
"We know these actions hurt millions of families, particularly African American, Latino and other minority families who were targeted for predatory loans and other practices. We saw many families who did the right thing and still lose their homes."
Non-white homeowners nationally were among the hardest hit by the implosion of the housing market and the foreclosure crisis. For example, Donovan said, black families lost half of their wealth during the four years prior to President Barack Obama's ascension to the White House, while Latino families lost roughly two-thirds of their wealth in that same time period.
The mortgage servicers who agreed to the deal are Bank of America Corporation, Wells Fargo & Co., JPMorgan Chase & Co., Citigroup Inc. and Ally Financial Inc. (formerly GMAC).
"This agreement ... is the result of unprecedented coordination among enforcement agencies throughout the government," said U.S. Attorney General Eric Holder in a separate press conference announcing the settlement. "It holds mortgage servicers accountable for abusive practices and requires them to commit more than $20 billion towards financial relief for consumers. As a result, struggling homeowners throughout the country will benefit from reduced principals and refinancing of their loans. The agreement also requires substantial changes in how servicers do business, which will help to ensure the abuses of the past are not repeated."
In addition Donovan explained, the settlement, besides providing immediate relief to homeowners, forces the banks to reduce the principal balance on a number of loans, refinance loans for underwater borrowers, and pay billions of dollars to states and consumers.
The violations of state and federal law include servicers' use of "robo-signed" affidavits in foreclosure proceedings; deceptive practices in the offering of loan modifications; failure to offer non-foreclosure alternatives before foreclosing on borrowers with federally insured mortgages; and filing improper documentation in federal bankruptcy court, Holder said.
Under the terms of the agreement, at least $10 billion of the $20 billion will go toward reducing the principal on loans for borrowers who, as of the date of the settlement, are either delinquent or at imminent risk of default and owe more on their mortgages than their homes are worth. At least $3 billion will go toward refinancing loans for borrowers who are current on their mortgages but who owe more on their mortgage than their homes are worth.
"This settlement holds banks accountable for what they've done and requires them to help the people they harmed by this and helping them stay in their homes," Donovan said. "It will reduce the overall loan balance for one million families who have mortgages higher than their homes are worth and help underwater homeowners in minority neighborhoods."
The settlement doesn't take banks off the hook. These institutions must still contend with more charges brought by the government, and lawsuits from investors and homeowners related to the way they packaged home loans into securities, and other mortgage-related activities.
The HUD Secretary said the measures in the settlement will help homeowners to begin building equity again and will result in a concomitant rise in the value of homes in affected neighborhoods where property values plummeted by $10,000 each time a for-sale sign went up in the neighborhood. It will also help unemployed homeowners catch up on late payments.
"It is particularly important because it (the settlement) funds house counseling services, legal services and other services to help communities struggling with vacant properties," said Donovan.
The District of Columbia stands to receive $46 million in benefits that will be available and distributed to about 2,000 homeowners. Also, $1 billion has been allocated to Maryland whose suburbs have been particularly hard-hit and devastated by the foreclosure crisis, said Donovan.
Eligible homeowners can expect to receive payments of between $1,500-$2,000 intended to compensate for the banks' routine errors, such as delays and lost paperwork. Federal officials sought to forego a lengthy application process and chose to structure the settlement along the lines of a class action for anyone involved. For homeowners with greater damages, there is a process for a family to come in, give evidence and prove they lost $100,000-$150,000. They could be reimbursed for the full amount of their home. And if they are not satisfied, they can take the lenders to court, Donovan explained.
He said there are two categories of funding with $2.5 billion sent directly to states. The state attorneys-general will decide how to allocate $1.5 billion to homeowners.
The refinancing and principal reductions will be decided by independent monitors who have full authorization and access to ensure that the banks follow through on the requirements of the settlement.
"Banks must follow the laws," Donovan said. "Any bank that hasn't done so should be held accountable and should take prompt action to correct its mistakes. And it will not end with this settlement. One of the most important ways this settlement helps homeowners is that it forces the banks to clean up their acts and fix the problems uncovered during our investigations. And it does that by committing them to major reforms in how they service mortgage loans. These new customer service standards are in keeping with the Homeowners Bill of Rights recently announced by President Obama – a single, straightforward set of common sense rules that families can count on."
Homeowners seeking housing counseling can call 1.888.995 HOPE or go online to makinghomeavailable.gov where HUD-approved counselors will offer assistance for free.