Landmark settlement announced on foreclosure, mortgage fraud

State and federal officials on Thursday announced a settlement of $26 billion with five of the nation’s banks over flawed and fraudulent foreclosure practices that affected several million homeowners and became commonplace after the housing boom turned to bust in recent years. It is the largest government-industry settlement in more than a decade.

The deal marks the culmination of more than 16 months of negotiation between lenders and a collection of state and federal officials. It aims to help troubled borrowers by requiring the banks to reduce the amount borrowers owe on their mortgages, lowering their interest rates and paying restitution to homeowners who suffered mortgage-related abuses. It will force lenders to revamp how they interact with struggling mortgage holders and bar them from trying to foreclose on borrowers while simultaneously negotiating mortgage modifications.

In addition, firms will have to make sure borrowers have a single point of contact with a lender, rather than being shuttled to different employees with each interaction.

U.S. Attorney General Eric H. Holder Jr. announced the deal — which he called the largest joint federal-state civil settlement in history — at a packed morning news conference attended by top federal housing and finance officials and attorneys general from many states.

Holder excoriated lenders for practices that he said “pushed borrowers into foreclosure” and “fueled the downward spiral of our economy.” He called the deal the country’s latest step forward in “righting the wrongs that led to our nation’s housing-market collapse and economic crisis.”

President Obama, in an afternoon briefing at the White House, lauded the effort that led to the settlement. “We have reached a landmark settlement with the nation’s largest banks that will speed relief to the hardest-hit homeowners, end some of the most abusive practices of the mortgage industry and begin to turn the page on an era of recklessness that has left so much damage in its wake,” Obama said while surrounded onstage by Holder and several state attorneys general. “And the bipartisan nature of this settlement and the outstanding work that these state attorneys general did is a testament to what happens when everybody is pulling in the same direction.”

Obama also reiterated his call to Congress to pass a series of measures to help struggling mortgage holders reduce their monthly payments and to stem the continuing slide in real estate prices.

Officials said the settlement — details of which can be seen on www.NationalMortgageSettlement.com — probably would be filed in a federal court within a matter of weeks and would require the consent of a judge. Once it is approved, banks would begin to deposit money into a trust account, and those funds would be distributed to qualified homeowners by the government. In all, 49 states have signed onto the agreement, with Oklahoma the lone holdout, federal officials said.

Under the terms of the deal, banks would have three years to complete principal writedowns, refinancings and other relief. But officials said they structured the deal so that it provides incentives for actions taken within the first 12 months so that the aid can get to homeowners sooner rather than later.

The settlement also includes about $17 billion that would go toward foreclosure-prevention measures, such as lowering the loan balance for borrowers who owe more than their homes are worth. Banks would be given varying “credits” for different ways in which they write off existing debts.

Other provisions would provide for lowering interest rates for homeowners who are current on their loans. In addition, as many as 750,000 borrowers who lost their homes to foreclosure since 2008 would be eligible for payouts of about $2,000 each, without surrendering the right to join future lawsuits, state officials said.

The five banks now at the heart of the settlement are Wells Fargo, Bank of America, J.P. Morgan Chase, Ally Financial and Citigroup. The banks faced a public uproar in late 2010 when it became clear that the legal paperwork they had filed in numerous foreclosures included flawed and fraudulent documentation. In many cases, because of the way in which loans were hastily packaged and sold to investors, banks had difficulty verifying ownership of the underlying mortgages.

Several Washington area housing counselors said the deal would probably do little to help their clients but that they needed to learn the details of the aid to be sure.

Cherelle Silue, manager of housing services at United Communities Against Poverty in Prince George’s County, said her first impression is that a homeowner could wind up not getting much.

“A thousand dollars is really not a whole lot of money,” Silue said. For homeowners who are trying to catch up on their mortgages, “we are talking thousands and thousands of dollars. . . . I am sure that it is going to be able to help someone, but I am not sure how many.”

Arturo Perla, 43, a married father of two young children who owns a five-bedroom home in Prince George’s, said he has barely been able to make his $1,600 monthly mortgage payment. The construction worker, who was unemployed for about a year and is the family’s sole provider, said he used all his savings to keep up the payments while on unemployment benefits.  The Temple Hills house the family bought seven years ago for $230,000 is now valued at $160,000. Perla said he has been seeking housing counseling and hopes an interest rate reduction will lower his monthly payment.

“Owning a home has been a dream come true for us,” Perla said, “and we don’t want to lose it now.”

Manuel Ochoa, regional director of homeownership at the Latino Economic Development Corp., which offers foreclosure counseling in the Washington area, said most of the firm’s clients would probably not benefit from the aid because they have fallen behind on their mortgage payments.

“There is going to be relief for a lot of middle-class folks who, through tooth and nail, have been making payments. Those people are finally going to get some relief,” Ochoa said. “But for the people who have fallen behind and still need help because they are underwater, it remains to be seen exactly how they are going to benefit from this settlement.”

The aid will come too late for residents who have already lost their homes, said Mickey Rhoades, a housing counselor with the city of Manassas. “How can it make a difference? The home is gone.”

But she said that homeowners barely hanging on may receive some relief. As banks and lenders work through the details, Rhoades said, she is eager to see how the settlement will play out. “We have to work through these first weeks to see what kind of impact it will have on our communities, but it sure does sound good,” she said.

The settlement could grow in size and scope if officials can sign on an additional nine mortgage servicing companies with which they’ve been negotiating in recent weeks. That would bring the total number of banks participating to 14 and could raise the face value of the settlement to about $30 billion.

Given the epic size of the nation’s housing crisis — including the millions of homeowners who are facing foreclosure or find themselves “underwater,” owing more than their houses are worth — some housing experts and consumer advocates have shrugged off the $26 billion settlement as a drop in the bucket. Those leading the talks have acknowledged that the deal would not repair all the damage created by the mortgage debacle. But they argue that it would end a series of egregious industry practices and keep many struggling borrowers in homes they might otherwise lose.

Thursday’s deal grew out of long-running negotiations with state officials, lasting more than 500 days, and came after key holdout states, including California and New York, agreed to sign on.

The talks got a major boost when they were endorsed by California ­Attorney General Kamala Harris, who had withdrawn her support last fall. Another key holdout, New York Attorney General Eric Schneiderman, also joined in supporting the settlement, which is backed by more than 40 states. Previously undecided states such as Florida and Massachusetts are endorsing the agreement as well.

The participation of California and New York helped ensure a key election-year victory for the Obama administration, which has been intent on finalizing an agreement that officials argued would deliver much-needed aid to ailing homeowners. The backing of California and New York also means a much larger settlement than banks otherwise would have been willing to sign.

Barely a month ago, Harris called the pending settlement “insufficient,” saying the relief being offered would not enable enough of her battered state’s homeowners to stay in their homes and would let banks off the legal hook too easily. She returned to the negotiations in an effort to strengthen the terms of the deal.

Schneiderman also has been an outspoken critic of the talks, calling for more investigations before any settlement and insisting that banks not be granted too broad an immunity for their misdeeds.

Negotiators maintained that they tried to narrowly tailor the legal releases in a way that would allow Schneiderman and others to move forward with investigations of other mortgage abuses.

The initial reluctance on the part of some states was due in part to their concern that the settlement would give banks a broad legal release from further investigations and lawsuits. But negotiators said the release in the final deal applies only to “robo-signing” and claims related to mortgage servicing. It leaves open the possibility of other lawsuits regarding fair housing and fair lending laws, civil rights claims, and claims dealing with how loans were packaged and sold, a process known as securitization. In addition, it does not shield the banks from any criminal violations that arise.

Staff writers Sarah Kliff, Luz Lazo and Jeremy Borden contributed to this report.

Brady Dennis is a national reporter for The Washington Post, focusing on food and drug issues.
Sari Horwitz covers the Justice Department and criminal justice issues nationwide for The Washington Post, where she has been a reporter for 30 years. Follow her @SariHorwitz.
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