After nearly 500 days of drawn-out negotiations, ever-changing deadlines, public in-fighting and private cajoling, state and federal officials this week appear poised to finalize a multibillion-dollar settlement with the nation’s largest banks over the shoddy foreclosure practices that became commonplace during the housing crisis.
Attorneys general in all 50 states have been asked to decide by Monday whether they will join the pending settlement, which would force the banks involved to overhaul their mortgage servicing practices and could include $25 billion in penalties aimed at helping struggling homeowners or those who have lost their homes to foreclosure.
The size of the deal could hinge on the participation of two key states, California and New York, whose attorneys general are skeptical of the settlement terms and thus far have publicly refused to sign on.
The penalties associated with the settlement could shrink significantly if California in particular does not participate, given the state’s massive number of foreclosures and the potential liabilities banks could face there. California Attorney General Kamala Harris has called the deal “insufficient,” saying that the relief offered would not enable enough of the state’s homeowners to stay in their homes and would “excuse conduct that has not been adequately investigated.” But officials overseeing the negotiations have remained optimistic that Harris might yet accept the final version.
Likewise, New York Attorney General Eric Schneiderman has long argued that officials should continue to investigate mortgage misdeeds before deciding a settlement and that banks should not be granted too broad immunity. But negotiators say they have tailored the legal releases in a way that could win Schneiderman’s support. Schneiderman recently was named by the Obama administration to a key post in a new mortgage-related investigative task force.
If Schneiderman and Harris sign on, it’s possible that all 50 states will participate in the largest industry settlement since the multistate deal with tobacco companies in 1998.
The five banks at the heart of the settlement -- Wells Fargo, Bank of America, JPMorgan Chase, Ally Financial and Citigroup -- faced a public uproar in late 2010 when it became clear that the legal paperwork in numerous foreclosures cases around the country included flawed and fraudulent documentation. Those revelations about so-called robo-signing led to settlement talks, which have dragged on over the past year because of the number of parties involved and the complexity of the issues at hand.
The pending deal would force the lenders to revamp the how they interact with troubled homeowners and would bar them from trying to foreclose on borrowers while simultaneously negotiating mortgage modifications. In addition, firms would have to make sure borrowers have a single point of contact rather than be shuttled to different employees with each interaction.
Officials say it would also include 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. Other provisions could lower interest rates on 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 reaction from some community groups was overall positive, although some wondered whether the settlement actually helps homeowners.
Ira Rheingold, director of the National Association of Consumer Advocates, said two of the most important parts of the settlement are its provisions for principal reduction and the preservation of individual homeowners’ right to take legal action against banks for wrongful foreclosures even after they receive a lump sum in damages.
“As long as homeowners can still go after banks, I think that’s okay,” Rheingold said. “The most important part of the settlement for me is that we will have rules about how servicers interact with consumers. In my mind, the actual check written out is small solace to people who have lost their homes.”
Rheingold said the agreement has its flaws: It would not mandate principle reduction for mortgages that are owned by private investors or by Fannie Mae and Freddie Mac, for example, and it’s unclear how the settlement’s homeowner protections would be enforced.
“It’s not going to solve all the problems we have right now,” he said. “There’s a long way to go still to undo all the damage that was done.”
Other legal experts were cautious in their optimism, pointing to the 2008 settlement with Countrywide, which some say failed to prevent mass foreclosures. Countrywide became one of the nation’s biggest subprime lenders. Officials said the firm’s loan officers and mortgage brokers would change a loan’s interest rate and other fees regardless of a borrower’s credit rating and that the company targeted black and Hispanic homebuyers for especially risky subprime loans. Bank of America bought the mortgage lender just before the practices were discovered.
“I haven’t seen the final agreement, but my basic concerns is will the money trickle down to homeowners?” said Dustin Zacks, an attorney with Ice Legal in Florida. “I have serious doubts that it will. The previous suit between Countrywide and the California Attorney General --I have yet to meet a single homeowner who has benefited from that
John Taylor, head of the National Community Reinvestment Coalition, said that the agreement would provide substantial foreclosure relief when taken together with proposals for mortgage relief by the Obama administration.
Last week, President Obama urged Congress to pass a measure allowing homeowners who are current in their mortgages to refinance at today’s record-low interest rates. In January, the president relaxed rules on a federal loan modification program for underwater homeowners.
“The more initiatives there are, the more likely it is that we’re going to nip this foreclosure crisis in the bud,” Taylor said. “Homes that continue to lose value just means more loss of equity, less consumer spending and less hiring…and that has a pervasive effect on our economy.”
Officials from the Department of Housing and Urban Development and the Justice Department, along with the state attorneys general leading the settlement talks, insist that the deal would provide immediate and much-needed relief to homeowners and improve the broken mortgage servicing system.
They have tapped North Carolina Bank Commissioner Joseph Smith to serve as a full-time monitor to ensure that the banks abide by the terms of the settlement. Obama nominated Smith in November 2010 to lead the Federal Housing Finance Agency, which oversees government-backed mortgage giants Fannie Mae and Freddie Mac. Smith’s nomination failed after Senate Republicans refused to confirm him.
The new position will be paid for by the banks under the terms of the pending settlement.