The U.S. Justice Department and various state attorneys general have entered into a deal with five major banks, Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial, in which the banks have agreed to pay $26 billion to help current and former homeowners. The deal is the result of a probe of the major mortgage lenders in which it was revealed that the lenders relied on improper practices, including “robo-signing”, i.e. signing foreclosure documents without reading them to speed along the foreclosure process. The deal is not only designed to hold banks accountable for the abusive foreclosure practices but also intended to boost the flagging housing market.
The bulk of the $26 billion settlement (i.e. approximately $17-$20 billion) will go to a payout to reduce the principal payments owed by existing homeowners who are underwater. Up to one million homeowners who fall into this category will get an average of $20,000 in the form of reduced debt on their homes. Another $4.5 billion will go towards allowing other underwater homeowners to refinance their homes at lower interest rates, and this $4.5 billion will also go to the banks who are going to be receiving the reduced interest payments on the mortgages. Another $1.5 billion will go to about 750,000 people who already lost their homes over a three-year period. Payments will average $2,000 per former homeowner. Homeowners who participate in the settlement would still have the right to pursue the banks in a civil action.
The five banks will also be making payments to local and federal regulatory agencies.
Experts’ reactions to the deal have been mixed, with many asserting that it does not go far enough to improve the housing market. There are approximately 11 million homeowners who are underwater, and the deal only reaches 1 million homeowners. Additionally, the average deficit for underwater mortgages is $50,000, so the $20,000 payment will not do enough to assuage their crushing debt. Moreover, some argue that the $1.5 billion payment to the 750,000 homeowners who have already lost their homes (an approximately $2,000-payment to each former homeowner) is not nearly enough. Others argue that the deal rewards homeowners who have fallen behind on their payments while not rewarding responsible homeowners who have struggled to pay their mortgages off in a timely manner. Some experts also contend that if a homeowner owes more on their mortgage than their house is worth, their remedy is to simply walk away from the home, not to receive a check.
Others point out that once one reads the fine print of the deal, one realizes that the banks are walking away with a slap on the wrist. The bulk of the money, approximately $20 billion, is not coming directly from the banks. Rather, it is coming from investors and, ultimately, taxpayers. Specifically, the part of the deal pertaining to mortgage principal write-downs (approximately $20 billion) will be funded almost entirely from securitized loans. The money from these securitized loans comes from investors, i.e. taxpayers via FannieMae and FreddieMac, pension funds, insurers, and 401 (k) funds. In fact, this deal will actually strengthen the banks’ balance sheets in the end.
The banks are not entirely in the clear, though. The deal only gives the banks limited legal liability. Hence, private homeowners and law enforcement agencies can still pursue the banks for their role in the mortgage debacle.
At present, the SEC is investigating the illegal marketing and selling of mortgage-backed securities during the real estate boom. Ally, Bank of America, Citigroup, Goldman Sachs and Deutsche Bank are several of the firms under investigation.
The story of how the once booming real estate market came to a crashing halt is an evolving one, and there will be many more revelations before this matter is finally laid to rest.