Breaking Down the $26 Billion Bank Foreclosure Settlement

Let me start by reminding everyone that “nothing” is what it appears to be, even on the evening news. All the major news outlets are quoting things like, “The deal would be the largest payout to date from banks in the wake of the financial crisis. And, “The settlement, 16 months in the making, could bring significant relief to those in danger of losing their homes and also much needed stability to the long-suffering housing market”. This is not entirely accurate!

Lets begin with some key statements in the press.

1. Those who already lost their home, would receive just the smallest fraction of the money: a one-time cash payment of about $1,800 as compensation. “Their entire lives have been turned upside down and changed,” said Philip Robinson, the acting executive director of Civil Justice, a Baltimore-based nonprofit that has worked with thousands of Maryland families fighting for their homes. “Does $1,800 sound fair? Does that seem like compensation for a financial and emotional tragedy?”

2. The Department of Housing and Urban Development, one of the Obama administration’s lead negotiators on the deal, could not be reached for comment.

3. The deal between federal officials, the state attorneys general and Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and Ally Financial is an attempt to close the book on a scandal that erupted in 2010, freezing the housing market as the legality of thousands of bank-initiated foreclosures were called into question. The announcement is expected to crank up the pace of bank foreclosures, which has slowed as government officials investigate whether some institutions have forfeited their right to repossess homes after forging key real estate documents.

4. As part of the deal, participating states would agree not to pursue a variety of independent lawsuits against the banks.

5. Some consumer advocates argue that the deal is inherently too lenient on banks because the administration chose to negotiate a settlement without first conducting a full investigation into the nature and magnitude of the banks’ alleged fraud.

6. “Any partial settlement is fraught partly because we don’t know the scope of the damages,” said Robert Borosage, founder and president of the Institute for America’s Future, a left-leaning nonprofit organization. “If the banks get broad immunity, homeowners get screwed because the next investigation won’t be able to get around that.”

7. Under the terms of the settlement, the banks would pay $25 billion to participating states. California is reportedly receiving a total of $6 billion to $15 billion in the settlement.

Potentially more significant, the banks would agree to forgive some mortgage debt owed by struggling borrowers through what’s called “principal reduction.” The remedy is nearly universally hailed by economists on the right and left as a way to revive the ailing housing market and rescue the nation’s struggling underwater borrowers: More than 20 percent of mortgage holders in the United States owe more on their loan than their home is worth. Citigroup, Wells Fargo and Ally Bank declined to comment while requests for comment from JPMorgan Chase went unanswered. Bank of America declined to discuss the terms of the deal, instead saying, “We’re interested in finding a path forward with a comprehensive settlement that benefits homeowners and communities.”

Additionally, language also states that “The settlement has the potential to prevent future wrongdoing through new bank guidelines that have been crafted as part of the deal. The effectiveness of these new rules will rely heavily on whether the states can enforce them”. This is the KEY, there is no one watching the banks!

We here at 360 Group agree that splitting a $26 billion deal between five banks, however, will amount to little more than the cost of doing business and is too small a penalty for the wrongdoing done. Many housing advocates say”. “Compared to what these [banks] literally stole, it’s just eyewash,” said Margery Golant, a Florida-based attorney who represents homeowners and formerly served as assistant general counsel at subprime mortgage giant Ocwen Financial. “These are such serious crimes and for everybody to get a pass like this, it just encourages them to think that they always will.”

Reality Check: Only a small minority of homeowners will get this benefit (1 million of 75 million or 1.3 percent of the Homeowners who made large down payments on their homes or made the terrible mistake to pay down the principal on their mortgages do not qualify. Homeowners who made minimal or no down payments THAT QUALIFY will get the benefit of a lower principal repayment and interest rate.

Also unclear is how far the agreement can go in helping borrowers who are trying to hold onto their home. In addition to granting “some” a principal reduction, the deal would offer struggling homeowners relief by changing the terms, or refinancing, loans. Those dollars amount to a pittance when you consider the millions of homeowners in need of help, Golant said. “If you do the math, that’s a few hundred million per state. That’s not enough to change anything.”

Consumer advocates supportive of the deal argue that while the settlement dollars are small, the principal reduction piece is critical. A handful of lenders have already begun offering such assistance, but mortgage giants Fannie Mae and Freddie Mac have fiercely resisted such a move. We at 360 Group have received several Principal Reductions for clients who qualified. More often than not, a portion of principal will be put on the back end of the loan and not calculated in the interest payment. This way the lender will eventually get the money when the home sells, it’s just a balloon payment in 25 years.

“This settlement could be a starting point for principal reduction,” said Ira Rheingold, president of the National Association of Consumer Advocates. “Hopefully it will demonstrate how principal reduction can and should benefit homeowners. If it is done well, maybe it will shame Fannie and Freddie into doing what it should have been doing all along.”

Economists are excited about the potential for principal reductions to boost the housing market. “If $15 to $20 billion is devoted to principal reduction modifications over the next year, that would significantly reduce the number of properties that ultimately end up hitting the market in a distressed sale, thus supporting housing prices,” said Mark Zandi, chief economist at Moody’s Analytics.

This is lip service to get the general public excited since Principal Reductions have already been offered to the Qualifying Homeowners and that will simply remain the same. We at 360 Group have been doing this for 4 years now and we see on a daily basis that not everyone qualifies. They will request banks statements, pay stubs and tax returns from millions of Americans and then use that data against them by declining those who do not qualify and from that point forward, you are out of luck. The fact is only 1 out of 10 people qualify for their guidelines. Then they black-list you from any help in the future. That’s why you need someone like us to review your documents first before sending to the bank to be sure you are not sending something that will hurt your chances to qualify. If you qualify great, but if you don’t we will tell you and then you’re NOT crossed of their list and you may qualify in the future if something with your income changes.

The states’ ability to enforce the deal remains one of the great unknowns. Nearly four years ago, 11 states signed an $8.4 billion settlement with Bank of America over predatory lending practices by Countrywide Financial. (Bank of America acquired Countrywide in 2008.) Most housing experts agree that the deal has significantly underperformed in large part because the states didn’t have a good mechanism for holding the bank accountable.

Settlement supporters have high hopes for the deal, though success has to be measured against very narrow expectations. “In the absence of sufficient federal action, sufficient regulatory action, sufficient congressional action, what we have left is a bunch of state attorneys general saying, ‘Our homeowners are getting hurt. We have to do something.’ “But the state resources are fairly limited, so you have to look at this in terms of what the attorneys general can accomplish within their own set of powers,” Mr. Rheingold added.

What did the mortgage lenders and loan servicers agree to do?

The banks and servicers have committed at least $17 billion to reduce principal for borrowers who 1) owe far more than their homes are worth 2) are behind on payments.

The AZ news falsely reported last night February 9th 2012 that you must be current to get help.

The amount of principal reduction will average about $20,000 per borrower and each borrower will still need to qualify. This has not changed for the last 5 years. Truth is that $20,000 for a principal reduction would have no net effect for a homeowner, and not be enough to make a significant difference in their payment if they are struggling.

Another $3 billion will go toward refinancing mortgages for borrowers who are current on their payments. This will enable them to take advantage of the low interest rates currently available ONLY IF THEY ARE NOT TOO FAR UPSIDE DOWN and can qualify.

The banks will pay $5 billion to the states and the federal government, the only hard money involved in the deal. Out of that fund will come payments of $1,800 to homeowners who lost their homes to foreclosure. Other funds will be paid to legal aid and homeowner advocacy organizations to help individuals facing foreclosure or experiencing servicer abuses. Another $1 billion will be paid directly by Bank of America to the Federal Housing Administration (FHA) to settle charges that its subsidiary, Countrywide Financial, defrauded the housing agency.

In addition, the banks agreed to eliminate robo-signing       See Blog Link Foreclosure Update for 2012.

The banks agreed to eliminate robo-signing and to use proper and legal procedures when putting homeowners through the foreclosure process. They also agreed to end servicer abuses, like harassing delinquent borrowers for payments, and to include principal reductions more often in their mortgage modifications programs.

I lost my home to foreclosure; how do I know if I qualify for payment? If you were foreclosed on in the calendar years 2008 through 2011, you may be eligible for a payment of up to $2,000. People who think they may qualify should notify their bank. The exact amount of the payments will depend on how many people participate in this part of the settlement. They will share equally in a pool of $1.5 billion. The U.S. Department of Housing and Urban Development expects about 750,000 former homeowners to take part.

If I take the money, what rights do I give up? Individual borrowers do not give up any right to sue.

As part of this deal, state attorneys general gave up the right to sue the mortgage servicers for foreclosure abuses arising out of the robo-signing scandal. However, they reserve the right to sue if they uncover improper acts when the loans were originated or when they were securitized. The relief for homeowners has to be completed within three years, but the state attorneys general and HUD want it to be front-loaded and completed within 12 months.

Would I have to pay taxes on the principal reductions or the pay-outs? If the principal is reduced in 2012, it will not be subject to income tax. That’s because the Mortgage Debt Relief Act of 2007 allows taxpayers to exclude income from the discharge of debt on their principal residence. The act is scheduled to expire at the end of this year, however. So if the act is not extended and the principal reduction occurs in 2013, borrowers may be on the hook to pay taxes on the settlement amount.

It’s not clear whether you would have to pay taxes on the $1,500 to $2,000 payout. The IRS declined to comment on the question. When they say that, you know you’ll get hit.

Which state didn’t participate and what does it mean if you live in that state? Oklahoma was the only holdout of the 50 states. Instead, it announced its own settlement with the five banks Thursday.

Under its settlement, the banks agreed to pay $18.6 million in damages, part of which would compensate homeowners who were victims of unlawful and unfair mortgage practices, according to the Oklahoma attorney general’s office. Homeowners who believe they may have been wrongly foreclosed upon should visit the Oklahoma attorney general’s website and fill out the paperwork for processing a claim.

Now the KICKER! Much of this money is going to help fund the administrative processes at the lenders. Only $5 billion of the $26 billion settlement will be a direct cost to the banks. The remainder will be the cost of modifying mortgages. Many of those modifications may be in the best interests of the banks to make as the alternative may be foreclosure, which can cost banks more in losses.

Now the banks can actually do what they were supposed to do 2 years ago and modify mortgages for struggling homeowners. It’s nice to know that more people will be able to Re-Negotiate their loans If you or anyone you know would like to find out if you qualify for a modification, please contact 360 Group Partners at 623-748-7448.


One thought on “Breaking Down the $26 Billion Bank Foreclosure Settlement

  1. Pingback: Success Stories for April « How To Save Money 360 Blog

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