States Negotiate $26 Billion Deal for Homeowners
By NELSON D. SCHWARTZ and SHAILA DEWAN
Published: February 8, 2012
After months of painstaking talks, government authorities and five of
the nation’s biggest banks have agreed to a $26 billion settlement that
could provide relief to nearly two million current and former American
homeowners harmed by the bursting of the housing bubble, state and
federal officials said. It is part of a broad national settlement aimed
at halting the housing market’s downward slide and holding the banks
accountable for foreclosure abuses.
Left, Mario Anzuoni/Reuters; Fred R. Conrad/The New York Times
The attorney general of California, Kamala Harris,
left, and New York's attorney general, Eric Schneiderman.
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Despite the billions earmarked in the accord, the aid will help a
relatively small portion of the millions of borrowers who are delinquent
and facing foreclosure. The success could depend in part on how
effectively the program is carried out because earlier efforts by
Washington aimed at troubled borrowers helped far fewer than had been
expected.
Still, the agreement is the broadest effort yet to help borrowers owing
more than their houses are worth, with roughly one million expected to
have their mortgage debt reduced by lenders or 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 final details of the pact were still being negotiated Wednesday
night, including how many states would participate and when the formal
announcement would be made in Washington. The two biggest holdouts,
California and New York, now plan to sign on, according to the officials
with knowledge of the matter who did not want to be identified because
the negotiations were not completed.
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 an
uproar over revelations that banks evicted people with false or
incomplete documentation. In the 14 months since then, the scope of the
accord has broadened from an examination of foreclosure abuses to a
broad effort to lift the housing market out of its biggest slump since the Great Depression.
Four million Americans have been foreclosed upon since the beginning of
2007, and the huge overhang of abandoned homes has swamped many
regions, like California, Florida and Arizona.
In New York State, more than 46,000 borrowers will receive some form of
benefit, with an estimated 21,000 expected to see what they owe reduced
through a principal reduction, according to estimates by the Department
of Housing and Urban Development.
The five mortgage servicers in the settlement — Bank of America,
JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial — have largely
set aside reserves for the expected cost of the accord and investors
are likely to cheer its announcement because it removes one more legal
worry for the industry, analysts said.
“I wouldn’t say it’s a panacea for the housing industry but it is good
for the banks to get this behind them,” said Jason Goldberg, an analyst
with Barclays.
As more and more states signed on this week, the negotiations with the
banks became especially intense, said one participant, who wasn’t
authorized to speak publicly. Two bank officials, Frank Bisignano of
JPMorgan Chase and Mike Heid of Wells Fargo, played a critical role in
the talks with Shaun Donovan, the secretary of Housing and Urban
Development, and Thomas J. Perrelli, the associate attorney general at
the Justice Department. Bank of America, which will make the largest
payout as the nation’s biggest mortgage servicer, moved more cautiously,
the participant said.
The settlement money will be doled out under a complicated formula that
gives banks varying degrees of credit for different kinds of help. As a
result, banks are incentivized to help harder-hit borrowers with homes
worth far less than what they owe.
While the $26 billion figure is the one being cited in the negotiations,
federal officials said they hope the eventual value for homeowners
reaches up to $39 billion. However, 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.
About one in five Americans with mortgages are underwater, which means
they owe more than their home is worth. Collectively, their negative
equity is almost $700 billion. On average, these homeowners are
underwater by $50,000 each.
A recent estimate from the settlement negotiations put the average aid for homeowners at $20,000.
“I just don’t think it’s going to be a life-changing event for
borrowers,” said Gus Altuzarra, whose company, the Vertical Capital
Markets Group, buys loans from banks at a discount.
Several billion dollars would cover the direct cash payments to
foreclosure victims and provide money for states’ attorneys general to
services like mortgage counseling and future investigations into
mortgage fraud.
Though many economists identify the moribund housing market as the
greatest drag on the recovery, it is not clear how much the settlement
will help.
Christopher J. Mayer, a housing expert at Columbia Business School, said
the accord could give banks more certainty that they can clear their
large backloads of seized homes, restoring the flow of those homes into
the market.
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“It may be good for individual homeowners, but if you don’t do something
to help the foreclosure process, it’s not going to help the housing
market,” he said.
Mark Zandi, the chief economist for Moodys Analytics, said that while
the settlement looked small compared with the scope of the problem, it
was not necessary to erase all, or even most, of the nation’s negative
equity to turn the market around.
About a third of houses on the market now are distressed, or have been
through foreclosure, he said, and reducing that percentage by just a
small amount could be enough to put a floor under housing prices.
More than the dollar figures, the settlement had been held up amid
concern by New York’s attorney general, Eric T. Schneiderman, that it
provided too broad of a release for banks for past misdeeds, making
future investigations much more difficult.
Mr. Schneiderman was able to win significant concessions from the banks in recent days.
In the agreement’s expected final form, the releases are mostly limited
to the foreclosure process, like the eviction of homeowners after only a
cursory examination of documents, a practice known as robo-signing.
The prosecutors and regulators still have the right to investigate other
elements that contributed to the housing bubble, like the assembly of
risky mortgages into securities that were sold to investors and later
soured, as well as insurance and tax fraud.
Officials will also be able to pursue any allegations of criminal
wrongdoing. In addition, a lawsuit Mr. Schneiderman filed Friday against
MERS, an electronic mortgage registry responsible for much of the
robo-signing that has marred the foreclosure process nationwide, and
three banks, Bank of America, JPMorgan Chase and Wells Fargo, will also
go forward.
Along with how broad the releases would be, California’s attorney
general, Kamala Harris, also pushed for her state to be able to use the
state’s False Claims Act. That would enable state officials and huge
pension funds like Calpers to collect sizable monetary damages from the
banks if officials could prove mortgages were improperly packaged into
securities that later dropped in value.