States and Lenders Settle for $26 Billion
According to the New York Times, five national lenders and most of the states have agreed on a settlement of $26 billion to address alleged abuses by lenders in foreclosure practices, the largest multistate settlement since the Tobacco Settlement in 1998. The deal grew out of an investigation into mortgage servicing by all 50 state attorneys general that was introduced in the fall of 2010 amid allegations that banks evicted people with false or incomplete documentation.
The five mortgage servicers in the settlement include Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial. The settlement includes a mix of principal reductions and cash payments to homeowners. A recent estimate from the settlement negotiations put the average aid for homeowners at $20,000.
Mortgages owned by the government’s housing finance agencies, Fannie Mae and Freddie Mac, will not be covered under the deal, excluding about half the nation’s mortgages.
The settlement will also provide money for states’ attorneys general for services like mortgage counseling and future investigations into mortgage fraud.
Roughly one million borrowers are expected to have their mortgage debt reduced by lenders or be able to refinance their homes at lower rates. Another 750,000 people who lost their homes to foreclosure from September 2008 to the end of 2011 will receive checks for about $2,000. The aid is to be distributed over three years.
The settlement is hoped by some to stabilize the housing market by allowing lenders to close the books on some liabilities and by reducing the extent to which some borrowers are underwater in their mortgages. However, there is disagreement among economists as to how much impact the settlement can have given that it addresses only a fraction of the mortgages that are currently underwater across the nation. One in five borrowers are estimated to owe more than their properties are worth, averaging about $50,000 each for a total negative equity of $700 billion.