A long-vaunted settlement arising from the sixteen-month 50-state investigation into faulty bank foreclosure practices, which has perpetually been imminent, has finally concluded. The deal was struck between federal banking officials, 49 states Attorneys General, and the five largest mortgage servicers - Bank of America Corp., JPMorgan Chase Co., Wells Fargo Co., Citigroup Inc., and Ally Financial Inc, which will release these servicers from liability for robo-signing and other forms of servicer abuse in exchange for a host of financial "penalties." In addition, nine other unnamed loan servicers may join the settlement later, which will notably increase the overall settlement value. Loans owned or backed by Fannie Mae and Freddie Mac will not be part of the deal.
Roughly $5 billion of the funds will be used as potential $1,800 - $2,000 payouts to hundreds of thousands of borrowers affected by the abuses and were foreclosed on between the beginning of 2008 and the end of 2011 (sorry we foreclosed, but here's a little check for your troubles). A portion of this $5 billion will also go to the states, which can use them for legal aid services, foreclosure mitigation programs, and ongoing fraud investigations in other areas
Another $17 billion will be used as "credits" toward writing down principal on roughly one million loans mainly held in by the banks as part of their own portfolios, as opposed to loans there were originated, sold, and securitized. Officials have said that some of the principal reductions will go toward mortgages held in private-label securities, which means that investors will take some of the hit, even though they would likely take a hit if any of the subject loans went to foreclosure.
Roughly $10 billion of the $17 billion held for principal reduction "credits" will go to borrowers who are delinquent on their mortgages.
The banks will not get dollar-for-dollar credit for every write-down; reductions on loans bundled in private-label mortgage-backed securities, for example, will be under 50 cents on the dollar, and write-downs for second liens (mostly home equity lines of credit) will be more like 10 cents on the dollare. Housing and Urban Development Secretary Shaun Donovan has stated that HUD will be able to get between $35-$40 billion in principal reduction in real dollars out of this settlement. Good luck trying to figure out who exactly is most deserving of the write-downs. No wonder Oklahoma's AG bowed out of this deal. The real issue - short changing the foreclosure process has not really been addressed.
Another $3 billion will be spent on refinancing borrowers who owe more on their mortgage than their home is worth.
As part of the deal, Bank of America will send $1 billion cash to the Federal Housing Administration. It also appears that Nevada’s and Arizona’s suits against Countrywide and Bank of America for violating its past consent decree on mortgage servicing has been “folded into” the settlement.
California will get $18 billion of the agreement. New York will receive $648 million in assistance from foreclosure settlement, including $495 million for principal reductions.
New York AG Eric Schneiderman will co-chair a task force with the Justice Department and HUD, reversed his previous decision to not sign onto the foreclosure deal. He was removed from the central negotiation committee last year when he tried to expand the scope of the investigation into securitization and other issues. His task force, along with California AG Kamala Harris and several other AGs, will look into secondary market and other fraud outside of the robo-signing probe.
Also as part of the deal, Schneiderman will not have to drop his suit against the banks for their use of the Mortgage Electronic Registration Systems or "MERS."
The servicers will send plans to a federal monitor, North Carolina banking commissioner Joseph Smith, who will have oversight responsibilities over the settlement. However, the monitoring process begins with a self-assessment from the banks through quarterly reports, which Smith and a committee can then review. This enforcement process is likely to take months to actually properly assess the settlement.
While this settlement sounds pretty large ($35-$40 billion), which, as David Dayen of Firedoglake points out, is at best, "a guess since the direction of the principal reduction is mostly at the discretion of the banks, pales in comparison to the negative equity in the country, which sits at $700 billion. And the banks have three years to implement the principal reductions, drawing out the loss on their books." In the end, this is a pretty minor slap on the wrist. “It’s not new money. It’s all soft dollars to the banks,” said Paul Miller, a bank analyst at FBR Capital Markets.
Indeed, of the purported $26 billion, the five largest banks only have to pony up $5 billion in cash, which they already had reserves for. No wonder bank stocks were all up on the news of the settlement. Some commentators have said that this settlement "is a a stealth bailout that strengthens bank balance sheets at the expense of the broader public." So the banking oligarchy wins again - shocker.