On April 5, 2012, U.S. District Court Judge Rosemary Collyer approved the $25 billion settlement negotiated on February 9, 2012, between 49 states and the federal government and five banks – Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, and Ally Financial. The deal, the largest multistate settlement since the Tobacco Settlement in 1998, settles federal and state claims against five of the largest banks in the United States for what has become known as “robo-signing”: signing foreclosure related documents outside of the presence of a notary public and without ensuring the documents were correct.
The settlement is slated to give victims of wrongly procured foreclosures relief “in the form of principal reductions, mortgage refinancing, and small payouts.” Up to $17 billion is to be given in the form of principal reduction, $3 billion is earmarked for helping underwater homeowners refinance, and some $1.5 billion is to be paid to borrowers whose homes were foreclosed upon. Finally, banks are required to pay a portion of the settlement directly to states to fund consumer protection and foreclosure protection programs.
The settlement’s proponents, including U.S. Department of Housing and Urban Development Secretary, Shuan Donovan, laud the settlement for giving approximately one million homeowners principal reductions and offering them some relief from their underwater mortgages. In addition, Mr. Donovan, while acknowledging that it is inadequate compensation, extols the virtues of having banks pay $2,000 to each of the approximately 750,000 families that lost their houses during a period where improper foreclosure procedure was rampant. Mr. Donovan states that the goal of such payments is not restitution, but instead “holding lenders and servicers accountable for how they treated a much larger group of homeowners – their customers – poorly.”
However, the settlement’s critics argue that the the deal struck is but a drop in the bucket. According to CoreLogic.com, nearly 11 million homeowners are currently underwater on their mortgage. Thus the 1.75 million homeowners benefiting from the settlement represent only 16% of troubled mortgage holders. In addition, banks won a major concession during negotiations entitling second mortgages to be written down equally with first mortgages. Generally, banks suffer losses associated with second mortgages during foreclosure, and critics strongly disapprove of the use of settlement funds for this purpose.
Further outraging the settlement’s critics, the deal does not cover loans held by two of the largest mortgage lenders in the nation: Freddie Mae and Fannie Mac. In fact, Edward DeMarco, the director of the Federal Housing Agency, which oversees Freddie and Fannie, has publicly said that he will not engage in principal reductions for mortgage holders because doing so would be unfair to taxpayers.
To learn more about the settlement as well as the cause of and possible solutions to the 2008 Mortgage Crisis, please register for “The Foreclosure Crisis: Challenges and Solutions to the Mortgage Meltdown,” Friday, April 13, 2012 at the International House on the U.C. Berkeley Campus.