To give credit where it is due: The most impressive part of the settlement is that it holds mortgage service providers accountable for abusive practices and will hopefully deter future misconduct. Getting the five biggest mortgage providers–Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial--to the bargaining table was a big achievement. More impressive still is the fact that, over a period of 13 months, they were able to reach an agreement with the federal government and regulators from 49 states (Oklahoma held out).
From a financial perspective, there are two issues. One is what it will do for the economy as a whole. The other is how much of a difference it will make to individual homeowners and those who have been hurt by the banks' improper practices.
In a broad sense, the settlement might ameliorate the housing crisis enough to bolster our economy a bit. It's certainly not going to send us into boom times.
For individual homeowners--or those who lost their homes--it will be a spit in the bucket.
Victims of foreclosure fraud. The plan would provide payments of $1,500 to $2,000 apiece to approximately 750,000 families that have been the victim of improper foreclosure practices. Since 2010, federal authorities have been investigating banks’ routine electronic notarization of documents being transferred from one financial institution to another as part of the foreclosure process–a practice known as robo-signing.
Compensation will be offered to people who lost their homes between Jan. 1, 2008, and Dec. 31, 2011. Those who want more than $1,500 apiece will have to sue for it. The settlement leaves open that possibility.
How about folks who are still in their homes? As noted on the National Mortgage Settlement web site, "Because of the complexity of the mortgage market and this agreement, which will be performed over a three-year period, borrowers will not immediately know if they are eligible for relief" [emphasis original]. To find your state attorney general’s website, go here and click on “The Attorneys General.”
Under the terms of the agreement, the banks are required to collectively dedicate $20 billion toward various forms of financial relief to borrowers. They fall into these categories:
Mortgage underwater but current with payments. More than 10 million homeowners in the U.S., due to a decline in home prices, owe more on their mortgages than their houses are worth. So even though interest rates have declined, they have been unable to refinance.
Under the plan, at least $3 billion will go toward refinancing loans for people who have been making loan payments on time. Those who meet basic criteria--yet to be announced--will be able to refinance with 5.25% loans (higher than the 30-year rate in most markets) guaranteed by the Federal Housing Administration. The estimated savings to them, according to Pres. Obama's Feb. 1 announcement, is about $3,000 a year.
Mortgage underwater and behind with payments. At least $10 billion will go toward reducing the principal on loans for borrowers who, as of the date of the settlement, are behind on their payments and owe more than their houses are currently worth. The plan would not guarantee a minimum amount of mortgage relief by state.
Miscellaneous other homeowners. Up to $7 billion will go towards other forms of relief, including forbearance of principal for unemployed borrowers, anti-blight programs, short sales and transitional assistance, benefits for service members who are forced to sell their home at a loss as a result of a Permanent Change in Station order, and other programs. "Because servicers will receive only partial credit for every dollar spent on some of the required activities, the settlement will provide direct benefits to borrowers in excess of $20 billion," the Justice Department states in today's press release.
Note to readers: I'll be covering more details of the settlement as they become available. You can follow these articles and others on Forbes by clicking the red plus sign or the blue Facebook “subscribe” button to the right of my picture above this post. You can also follow me on Twitter.
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Deborah L. Jacobs, a lawyer and journalist, is the author of Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide.
