The five largest mortgage lenders in the U.S. reached a historic lawsuit settlement last week with the state’s attorney generals. The AGs were suing on claims of fraud related to mortgage loans, deceptive practices, robo-signing of paperwork, and a whole host of other issues. The agreement is for about $25 billion in relief from the banks to several classes of consumers. This post will give you a clearer picture of the settlement and how it impacts you.
Many state attorney generals sued and negotiated a global-type settlement that will give some relief to people already foreclosed upon and some relief to existing mortgage borrowers. The pact, if it receives final approval by all parties and the judge, will probably provide about $1,500-$2,000 of compensation to about one million people who have already been foreclosed upon. It will also provide a write-down of the principal mortgage loan balance for an estimated 850,000 people who are behind on their loans. The average write-off is estimated to be about $20,000 per loan, according to the Boston Globe. Additionally, it will provide about $5 billion dollars of money to fund state-controlled homeowner assistance funds.
But while that $25 billion is called, by some parties, a global victory amount punishing the banks, other analysts say it is letting the banks off the hook too easily, especially since they’ve already received taxpayer bailouts. But you can't bash these banks for the bailouts as these banks will likely pay back those original bailout funds, plus interest and stock rights, so that the U.S. government will actually earn a profit on their bailout loans. Instead, it’s the car companies, AIG insurance, and some small banks that will end up being losses to the taxpayers.
But regardless of whether this is a good or a bad deal for the banks, the public, the government, etc., this settlement will hopefully put the past housing mess behind us so the market can begin to correct itself.
All in all, the money and relief will be distributed only between borrowers of the five major banks that are party to the agreement: Ally Financial, Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM), and Wells Fargo (WFC). In addition, it is only for loans that originated between 2008 and 2011. It also will not apply to loans held or serviced by Fannie Mae or Freddie Mac, who control about half of the mortgage market. You’ll need to look at your mortgage statement and call your mortgage loan servicer to see if you qualify for relief.
If your loan is owned by one of the banks, but not underwater, you are not eligible for any monies. If your loan isn’t owned by one of those banks or wasn’t originated in the loan period, you are also out of luck. Others losing out on this deal will be the shareholders of these banks whose stock prices will probably drop due to this settlement. Lastly, the mortgage bond holders, who have little say in the process, will also take losses due to the mortgage balance write-downs. And guess what? Your parents and grandparents probably own those stocks and bonds via their retirement funds, making this move affect them directly too.
This program will certainly help some select parties, but it’s another government-sponsored effort, which will possibly slow down the housing market from correcting itself, and will transfer wealth from the banks and their shareholders to private individuals who may or may not deserve it. In addition, it may do very little to directly help the economic recovery.
But not all is lost. The main thing we should look forward to from this agreement is that hopefully, with this uncertainty removed, banks can move forward and start processing the remaining foreclosures and provide more mortgage loans to qualified borrowers again. And that might help us get the U.S. housing market back on track.
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