By Ronald D. Orol, MarketWatch
WASHINGTON (MarketWatch) — After more than a year of negotiations, the biggest banks, states and federal authorities on Thursday announced the largest housing settlement ever -- for more than $26 billion -- over foreclosure practices that is expected to offer relief to more than one million U.S. homeowners.
State attorneys-general and federal officials have been in discussions for more than a year with banks over the “robo-signing” crisis - the practice of assigning bank employees to rapidly approve numerous foreclosures with only cursory glances at the glut of paperwork to determine if all the documents are in order.
The settlement is with five big banks: Bank of America Corp. BAC +0.37% , J.P. Morgan Chase & Co. JPM -0.34% , Citigroup Inc. C -1.20% , Wells Fargo & Co. WFC +0.18% , and Ally Financial Inc., the company formerly known as GMAC.
Nine other financial institutions that have mortgages servicers are in discussions with states and federal regulators, and an agreement that includes them could hike the final settlement amount by billions of dollars. If these other servicers participate, the total settlement could rise to between $30 billion and $45 billion in housing relief.
Of the $26 billion in the deal with the five banks, $17 billion must be spent by the banks to assist struggling homeowners. Of that amount, 60% must be employed to reduce the amount owed by troubled borrowers, known as principle reduction. The amount must be spent within three years, or banks will need to make cash payments to regulators.
A government official said he believes the vast majority of principal write-downs will take place on loans sitting on bank portfolios because they will receive the largest credit against their obligations under the settlement to do so.
The banks would need to meet certain minimum targets, in terms of borrowers assisted, and a bank will receive a much greater credit for reducing principle on a loan on their portfolio, as opposed to a loan serviced for others, according to officials who drafted the deal.
The $17 billion number could grow significantly if banks chose options where they receive a lower credit, such as reducing the principal of loans owned by private mortgage bondholders.
Regulators said that the deal does not resolve all the issues associated with the financial crisis of 2008 and does not relieve banks from various Securities and Exchange Commission claims or certain claims that the new Consumer Financial Protection Bureau might have against the banks.
Regulators said the settlement does not block the states and other regulators from pursuing claims on issues associated with the problems with the securitization or origination of mortgages.
Cash to homeowners, and more
The deal also requires banks to set new servicing standards in the wake of the robo-signing practices.
An additional $5 billion is being allocated in cash to the states and federal government, of which $1.5 billion is being allocated to a fund to be used to provide restitution to homeowners who have lost their home between 2008 to 2011 because they experienced some form of mortgage servicer abuses. The amounts borrowers will receive will vary, but regulators estimate that borrowers could receive between $1500 and $2000 depending on the harm done to them.
Other funds going to the states will be used for their own mortgage assistance programs, including a wide variety of programs, including mediation assistance, housing counseling and mortgage help hot-lines.
Another $3 billion will go to provide refinancing opportunities to borrowers who are current on their mortgages but have no equity in their homes. The program will be similar to an existing Obama administration program that seeks to help these so called underwater homeowners.
Roughly another $1 billion is part of a settlement between the Federal Housing Administration and one financial institution over an origination claim.
Housing regulation officials said they expect close to 50 states to participate. California Attorney General Kamala Harris said Thursday that the state’s borrowers will receive up to as much as $18 billion in foreclosure relief.
The next step is for the settlement to be filed as a judgement in federal court within a couple weeks. The court will need to approve the judgement. After that, servicers will be obligated to write a check and deposit some funds into an escrow trust that will distribute cash to federal governments and states.
Ronald D. Orol is a MarketWatch reporter, based in Washington.