How the Foreclosure Settlement Could Affect You

Marking the conclusion of the largest joint state-federal settlement in history, the National Association of Attorneys General announced today that the nation's five largest mortgage servicers -- Bank of America Corporation, JPMorgan Chase & Co., Wells Fargo & Company, Citigroup, Inc., and Ally Financial -- have agreed to pay a $25 billion judgment to settle an investigation into illegal foreclosures.

Government agencies launched the investigation in response to revelations that, in the wake of the housing bust, banks had mishandled foreclosure paperwork and illegally foreclosed on homes. The deal could provide some relief to close to 2 million homeowners, The New York Times reports. And though by no means a panacea to the nation's housing woes, the settlement may give the beleaguered market a nudge in the right direction, experts say.

Here are the major points in the deal:

Principal Reduction

Servicers must pay $17 billion to homeowners in the form of principal reduction and other foreclosure relief mechanisms. Since servicers may actually benefit from modifying many of the loans (modification often reduces the risk of default), they will not receive 100 cents on the dollar in credit for many of the principal reductions. As a result, the $17 billion could translate into an estimated $32 billion in relief, the National Association of Attorneys General says. Servicers must pay the $17 billion within three years or face cash penalties.

Refinancing for Underwater Homeowners

Servicers will commit $3 billion to refinance underwater mortgages. A homeowner is underwater if he owes more on a mortgage than his home is worth.

Limited Eligibility for Principal Reduction and Refinancing

The relief conduits outlined above -- surely to the frustration of many homeowners -- mostly apply to bank-owned loans. Only 20 percent of mortgages fall into this category. The rest of loans in the country are mostly owned by investors, and by Fannie Mae and Freddie Mac, who buy mortgages from lenders. Some experts, like Jack Guttentag of The Mortgage Professor website, argue that this is unfair because it's up to banks to make the choice to own mortgages that they originate or to sell them to Fannie Mae or Freddie Mac. Homeowners have no say. The Federal Housing Finance Agency, which overseas Fannie Mae and Freddie Mac, has repeatedly stated that it will not allow principal reductions on any mortgages guaranteed by the two mortgage giants. The agency says mass principal reductions would cost the government-sponsored companies $100 billion.

$2,000 for Foreclosed-On Borrowers

Servicers will pay about $2,000 to homeowners who lost their homes to foreclosure during the period from Jan. 1, 2008, to Dec. 31, 2011. The payment is not reserved strictly for borrowers who were illegally booted from their homes. All homeowners who were foreclosed on by the five banks are eligible for the cash award. In total, servicers will fork over $5 billion to states and the federal government to fund the payments. To receive the payment, borrowers must complete an application and undergo a screening process. Borrowers do not forfeit their right to sue servicers by taking the payment.

New Protections

Homeowners will receive new protections, some crafted specifically to guard against improper foreclosure. Banks must now offer a single point of contact for borrowers and adhere to new review and processing requirements. The protections prohibit banks from negotiating a loan modification while simultaneously pursuing a foreclosure.

Limited Immunity From Lawsuits

Borrowers may still sue banks for the same improprieties that sparked the investigation. The settlement only grants banks immunity from prosecution by the government for foreclosure abuses. The settlement does not release the banks from claims relating to mortgage-backed securities -- marking a win for several state attorneys general who feared that the deal would let banks off the hook for other improprieties committed in recent years.

Enforcement

An independent monitor will enforce the terms of the agreement. Joseph A. Smith, Jr., who formerly served as the North Carolina Commissioner of Banks, will fill the position. The monitor may enforce the agreement in court and impose penalties on lenders who stray from its terms, according to the Center for Responsible Lending.

Note: Under a different enforcement action, homeowners who believe they lost homes to improper foreclosure may seek redress by requesting a review of their case. If the assessment determines the borrower suffered "financial injury," CNNMoney reports, the borrower could receive compensation.


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