Posted by: SWL | February 13, 2012

Five Banks Agree to Settlement on Mortgage Foreclosure Abuses

Last Thursday President Obama announced a settlement between the government and five major banks over charges that the banks violated homeowners’ rights by not verifying foreclosure documents and “robo-signing” (signing off on documents without reading them).

Background on the housing crisis:
In 1994 Congress passed legislation that required banks to “help to meet the credit needs of the community”, with those needs being defined by federal bank regulators. The government decided at that time that more people needed to own a home and it was up to the banks to make that possible by changing their lending standards.

Lower loan qualification standards and a booming economy created rapid growth in the housing market. One problem was a huge increase in speculation (i.e. “flipper” investors who bought homes and sold them immediately after making improvements). Value was added in many cases, but real estate prices rose higher more quickly than normal. The looser qualifications for a loan also led many people to buy a home they could not really afford and others “qualifying” to buy a larger home than they could have obtained under the old standards.

Financial institutions had been pushed into this by the government, but they were making money in the good economy and invented more types of loans to encourage more people to apply for mortgages.

Then the economy slowed down. Wages did not go up, but prices did, especially gasoline. Some homeowners that had obtained subprime mortgages had trouble making the monthly payments. Eventually millions of Americans lost their jobs and many lost their homes.

Mortgage holders were inundated with delinquencies and eventually foreclosures. They dealt poorly with the foreclosure process: losing documents, not giving proper notice to homeowners, and “robo-signing” documents. These abuses are what the banks are being punished for at this time.

Details of the settlement:
Ally Financial, Bank of America, Chase, Citigroup, Wells Fargo and 49 states (Oklahoma approved a separate agreement) reached a settlement, which was brokered by the federal government. The banks will pay a total of $25 billion which will be divided among these programs:
* $10 billion to reducing loan balances for customers who are delinquent on mortgages that are “underwater” (what is owed on the mortgage is more than the market value of the house). About 1 million homeowners could qualify.
* $3 billion for reducing the interest rate on loans that are current but underwater.
* $1.5 billion for direct payments of $2000 to about 750,000 homeowners who lost a home to foreclosure.
* $7 billion for short sales, assistance to military families, transitional help to people leaving their homes.
* $2.6 billion to the states for foreclosure prevention programs.
* $766 million in penalties to the federal government.
The five banks have three years to implement these payments and mortgage rescues.

(Interestingly, the initial lawsuit was brought against these banks by Richard Cordray, who was later appointed by President Obama to head the new Consumer Protection Bureau.)

Do not confuse this with the President’s $5-10 billion plan, announced during the State of the Union speech, to help homeowners refinance into lower interest government loans, which I described on February 3. That plan would be paid for with a fee on banks, separate from the $25 billion they will pay in this settlement.

Impact of the settlement:

* If you are behind on your house payments and the value of your home is underwater, you may qualify for a reduction of the principle balance of the loan, if the loan servicer is one of the five institutions in this settlement. Some homeowner could have as much as $20,000 simply subtracted from their mortgage balance.
* If you lost a home through foreclosure to one of these five banks, and you can claim problems with the process, you should receive a $2000 payment. You cannot get your home back.
* If you are current on your payments, but your home is underwater, you will be able to refinance at a lower rate. (Again, your loan must be owned by one of these five financial institutions.)
* If you are being considered for a loan modification, the lender may not begin foreclosure proceedings.
* If you have a mortgage with one of the five banks but are nor underwater, you might be able to refinance.
* If you have a mortgage (current or delinquent) held by another private lender or Fannie Mae/Freddie Mac, you get nothing.
* If you bought your home before the housing bubble and have been faithfully paying the mortgage for many years (or have paid it off), you get nothing.

There is concern that foreclosure rates will now go up. These five banks had stopped most foreclosures while negotiating the settlement. Loans that do not qualify for help under this plan would again be subject to foreclosure.

Who benefits the most from this settlement? It appears to be those who are behind on payments. Some may be the “responsible” homeowners President Obama likes to mention. But many are delinquent because they should not have qualified for a mortgage in the first place.

Those who have been hurt the most – people who lost homes to foreclosure because of circumstances outside their control (like unemployment) – will get only a small payment in compensation. Many who went through foreclosure because of their own financial neglect, excessive spending, etc. will get a payment they do not deserve.

I consider it undemocratic that hundreds of thousands of homeowners – some who are irresponsible – will essentially be given a $20,000 gift by reducing their mortgage balance. Other homeowners who are in exactly the same circumstances, but have the misfortune to be with a different bank, will get nothing. It is also unfair that responsible long-time homeowners don’t get anything. Actually, that should be reworded. Everyone agreed to the terms of their mortgage – no one should be given anything.

Thinking this through, it’s easy to see that those who will ultimately pay for this $25 billion bailout are the customers and investors of the five financial institutions involved. In some ways all taxpayers are paying at least a part of this because we (through the federal government) gave our tax dollars to these banks in the TARP bailout.

It also concerns me that the executive branch of the federal government is breaking contracts in private business matters. It began with taking over General Motors and breaking agreements concerning unions and retirement pensions, and wiping out stock holders. In this situation, the feds told the banks in the 1990s to give mortgages to more (i.e. poorer) people and are now penalizing the banks because things did not work out the way legislators and regulators hoped.

Notes:
The New York Times had an interesting piece on the problem of policing this settlement. The article mentions problems here in Nevada with two previous mortgage programs.

Many of the facts for this article came from these sources:
http://theaffordablemortgagedepression.com/2009/05/18/origins-of-the-housing-bubble-the-riegleneal-act-of-1994.aspx?results=1#SurveyResultsChart

http://www.chicagotribune.com/business/breaking/chi-robisigning-settlement-to-be-finalized-20120209,0,1608260.story

http://www.reuters.com/article/2012/02/09/us-mortgage-settlement-idUSTRE81600F20120209

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