Banks make progress on $25 billion mortgage settlement

February 21, 2013

A year has passed since state and federal authorities reached a $25 billion settlement with five of the nation’s largest banks over fraudulent foreclosure practices that were commonplace after the housing bust.

On Thursday, the court-
appointed monitor of the settlement issued a report showing that more than half a million homeowners have received about $46 billion worth of loan modifications, short sales, refinancings and forbearance. The activity spans from March through December and was self-reported by the banks involved in the agreement: Wells Fargo, Bank of America, JPMorgan Chase, Ally Financial and Citigroup.

“The servicing settlement has contributed to a recovery in our housing market and has already exceeded our expectations,” said Shaun Donovan, secretary of the Department of Housing and Urban Development, during a call with reporters. He noted that authorities initially anticipated about $34 billion in assistance but now expect consumer relief to exceed $50 billion.

The news arrives as the housing industry is reporting a sharp decline in seriously delinquent residential mortgages. Home loans that were 90 days or more past due fell to 7 percent in the fourth quarter, the lowest level since 2008, according to the Mortgage Bankers Association. Struggling homeowners are catching up on payments or benefiting from alternatives to foreclosure as the economy improves.

According to the settlement report, short sales accounted for roughly 42 percent, or $20 billion, of the total relief the banks have extended to consumers. Loan modifications took up the second-largest portion of the funds, with about 241,149 borrowers receiving $18 billion in assistance.

Although consumer groups praise this progress, many are disappointed that so much of the aid has come in the form of short sales.

“It’s shameful,” said Kathleen Day, a spokeswoman for the Center for Responsible Lending. “A short sale is a kissing cousin to a foreclosure; it depresses property values and kicks people out of their homes. Haven’t the banks done enough damage?”

Proponents of the settlement process, however, point out that the aggregate amount of money spent on all the other relief efforts, including forbearance and modifications, outweigh the amount spent on short sales. What’s more, the $11 billion in principal reductions far exceeds the $5.1 billion required under the agreement, said Iowa Attorney General Tom Miller, a key player in the settlement talks.

“A lot of homeowners are benefiting in many ways,” he said. Miller stressed that short sales are still a better alternative to foreclosure because “the homeowner doesn’t have the liability going forward, investors can get more money . . . and the housing market is stabilized.”

The settlement was the culmination of more than 16 months of negotiations between lenders and a cadre of 49 state attorneys general and several federal agencies. It arose from allegations that lenders used forged and shoddy paperwork to quickly foreclose on struggling homeowners, a practice known as “robo-signing.”

Mortgage servicers, under the agreement, were required to provide $20 billion in relief to consumers, with different types of relief assigned different credit toward that figure. An additional $5 billion went to states for foreclosure-prevention programs.

Authorities sought to help struggling homeowners by requiring the banks to lower interest rates, reduce the amount owed on mortgages and pay restitutions to victims of mortgage-
related abuses.

The agreement aimed to change the way lenders interact with troubled homeowners by preventing banks from initiating a foreclosure while simultaneously negotiating a modification, a practice known as dual-tracking. Banks also were supposed to give borrowers a single point of contact to ensure they weren’t being bounced around to different employees with each interaction.

But advocates say not much has changed in the way lenders treat Americans trying to hang on to their homes.

“We’re still seeing too many borrowers having trouble communicating with banks, being forced to repeatedly submit documents. And we’re still seeing
dual-tracking,” said Mark Ladov, an attorney at the Brennan Center for Justice at New York University School of Law. “The servicing reforms need to be better enforced.”

Joseph A. Smith Jr., the settlement monitor, acknowledged that banks had “more work to do on behalf of borrowers,” but he said he was pleased with the progress that has been made. His office is keeping an eye on servicing standards and will issue a report in May detailing the progress.

Banks have three years to complete principal write-downs, refinancings and other relief. The settlement provides incentives for actions taken within the first 12 months to speed the pace of disbursement.

Ally, which provided $257 million in relief, is the only bank to fully meet its obligations under the agreement, though the other institutions have much larger payouts. Bank of America has doled out the most money: $26.8 billion to 318,024 homeowners.

Locally, 410 homeowners in the District received $32.3 million in assistance, 14,217 borrowers in Maryland were provided $1.1 billion and 5,790 Virginians got $408.1 million in assistance, according to the report.

Danielle Douglas covers the banking industry for The Washington Post.
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