Proposed settlement with Banks little help for homeowners

A proposed $25 billion settlement between five big banks, state attorneys general and the Obama administration will do relatively little to stop the ongoing wave of home foreclosures or to revive the deeply depressed housing market. The program would help some “underwater" homeowners but there are currently about 11 million borrowers with an average shortfall of roughly $65,000 — or a total of $700 billion — in “negative equity.” 


Talks got underway more than a year ago after a series of private lawsuits focused national attention on an outbreak of “robo-signing” and other shoddy and fraudulent document processing practices by mortgage servicers foreclosing on homes. Among the abuses regulators found were so-called “dual track processing” in which lenders working with a homeowner to modify a mortgage would (on the side) continue with legal proceedings to foreclose. In other cases, lenders had foreclosed without properly showing they had the right to do so. 


The deal would require banks to devote roughly $17 billion of the total settlement to various types of loan modifications for homeowners. Rather than paying that amount in cash, lenders would receive a series of credit toward that amount based on a complex formula that would assign different levels of credit to different types of modifications. Decisions about which loans to modify would be left to bankers.


The program would apply mostly to the relatively small universe of home loans owned outright by the five lenders, including Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial (formerly GMAC). Loans held by government-controlled Fannie Mae or Freddie Mac — some 60 percent of the 31 million U.S. home loans outstanding — would not be covered in the deal.


Another $5 billion would be set aside to help support state foreclosure relief programs. A portion of those funds would be used to pay homeowners who can demonstrate they were victims of abusive or fraudulent foreclosure practices. Those awards would average about $1,800. The system for arbitrating those claims and distributing those checks has yet to be worked out.


Another $3 billion would be applied to a program to refinance mortgages at lower rates. 


If enough states go along, lenders would emerge largely unscathed from the settlement, amounting to a slap on the wrist.


Critics have argued the proposal lets bankers off the hook too easily for the mortgage mess they created with sloppy underwriting during the housing boom.