In the past two days there have been two huge settlements between some of the nation’s largest lenders and the government. These two separate settlements hope to address both the needs of homeowners who were subjected to foreclosure abuses, and also to help ameliorate the damage done by bad home loans sold to Fannie Mae. Both of these issues were a large part of the housing bubble that precipitated the financial crisis of 2008.
Bank of America Settles with Fannie Mae
Bank of America has agreed to a settlement with Fannie Mae for a total of $10.3 billion to address questionable home loans that were sold off during 2009 and 2010. Bank of America will pay out $3.55 billion directly to Fannie Mae as a part of the deal. An additional $6.75 billion will be paid to Fannie to repurchase 30,000 mortgages that are anticipated to produce losses. It is these bad home loans that led to the massive losses suffered by the mortgage guarantor and which culminated in Fannie Mae being taken over by the government and stimulated with a $116 billion bailout in order to keep it functioning.
These loans were originated by Countrywide Financial between 2000 and 2008. In 2008, Bank of America purchased Countrywide for $4 billion and assumed ownership of these bad loans, which they later sold to Fannie Mae. As a condition of the settlement, the $6.75 billion that Fannie Mae receives will go to the US government as the mortgage company is currently barred from keeping any profits.
Ten Banks Reach “Independent Foreclosure Review” Settlement
In an unrelated settlement, ten of the nation’s banks have agreed to an $8.3 billion dollar settlement in order to settle claims of foreclosure abuses. This settlement includes direct cash payments to borrowers and an additional $5.2 billion that will be used for other types of housing assistance, such as loan modifications and forgiveness of deficiency judgments.
This is a distinct and different settlement from the $26 billion foreclosure settlement of 2012. This settlement comes in response to a 2011 action by the Federal Reserve and the Office of the Comptroller of the Currency against 14 different banks. This action required these banks to hire independent consultants to investigate accusations of foreclosure abuse, and to provide compensation to the victims. That process, dubbed the “Independent Foreclosure Review,” has proven prohibitively expensive and has not produced results in a timely fashion.
Of the eligible 4.4 million borrowers, just 495,000 had applied to have their cases reviewed as of the end of 2012. As a result, federal regulators have said the review process will be replaced, “with a broader framework allowing eligible borrowers to receive compensation significantly more quickly.”
This means that the independent reviews at the 10 banks involved in Monday’s deal will conclude and the roughly 3.8 million borrowers whose homes were in foreclosure in 2009 and 2010 will receive cash compensation. Struggling borrowers whose mortgages are still serviced by one of these ten banks will receive help from the remaining $5.2 billion that is a non-cash payment. That money will be used to assist borrowers through benefits such as loan modifications and possible forgiveness of deficiencies.
The Good News
These two settlements are great for banks because it allows them to begin to put the mortgage abuses of the early part of the century behind them. It is likewise good for regulators as they can confidently state that they brought these lenders to task and will count this as a victory. It also allows the new leadership of the housing regulators to start fresh.
The Bad News
Considering that there are nearly 4 million borrowers still in need of assistance, and these cash payouts average out to only about $1,000 per household, this is not necessarily the best news for homeowners. Rep. Elijah E. Cummings, a member of the House Committee on Oversight and Government, stated that he was, “deeply disappointed” the regulators decided to proceed with the settlement “before providing Congress answers to serious questions about how this settlement amount was determined, who these funds will go to, and what will happen to other families who were abused by these mortgage servicing companies.”
Also, while the exact details are still being concealed there are initial reports that these foreclosed mortgages would be classified and compensated according to the severity of the abuses. Those in which a serious fraud took place may receive as much as $125,000, while those with clerical errors in their loans may get no more than $250.
Additionally, going back to the massive settlement that Bank of America has agreed to with Fannie Mae, there are no provisions for homeowners who have signed bad loans to receive monetary compensation. It is possible that some of these borrowers may receive help in the form of loan modifications and other non-cash assistance.
So What Does This Mean For Borrowers?
Until the complete details of these settlements are released it is hard to know how this will play out for borrowers and the effects that it will have on remedying the housing market.
If you are a Washington homeowner or real estate agent, be sure to come back and read Lynn’s blog to find out more details as they are released and to learn how this settlement will affect you.
For more information contact me at office@lynnarends.com. If you have received a settlement letter and would like to speak with an attorney, call my office at (206) 282-4848, or visit our website at www.lynnarends.com.
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