What are the basics of this settlement?
This settlement, between five large private US banks(Ally, Band of America, Citigroup, J P Morgan and Wells Fargo) and the federal government and United States States’ Attorney Generals(excluding Oklahoma), is in response to possible foreclosure and loan processing abuse. The $25B funding will go to roughly 1million homeowners as well as those who were recently foreclosed upon. The money will be used for principal reduction, refinancing as well as outright payments to affected individuals.
Who does it affect?
The settlement primarily affects homeowners who have 1st and 2nd mortgages with the banks involved, as opposed to loans that are backed by Fannie Mae and Freddie Mac. It comprises three groups:
- Underwater homeowners- they will now be able to get refinancing on their homes. This was previously not allowable due to their high loan to value ratio.
- People who were foreclosed upon over the past 4 years- they will receive one time payments of roughly $1500-2000.
- Borrowers who are behind on their payments and at substantial risk of foreclosure- they will get loan re-modifications involving principle reductions.
How can you get more information to see if your loan might be affected?
Contact the phone number provided on the web site of your bank. Details will continue to emerge as these programs are launched. In general, eligible homeowners will be contacted via mail.
Will this program help the housing crisis?
That remains to be seen. Essentially this is a transfer of payments from bank shareholders and mortgage backed securities investors to people who are not paying their mortgage (as well as to the state and the Fed).
Unfortunately, even with modifications, the borrowers may still default. In fact, 42% of loans in foreclosure have not made a payment in two years, and over 10 million properties are underwater, so this program just scratches the surface.
The bubble has burst and we need to let the markets clear the system and revert back to fair pricing based on supply and demand. On a positive note, now that this program is in place, the foreclosures can continue and thus provide us with much needed “market clearing.”
What does this mean for banks?
This helps quantify the losses that banks were going to suffer due to litigation (although they still can be sued). More importantly, they can resume the orderly foreclosure process of millions of homes that had been interrupted due to the robo-signing controversy.
In addition, the banks must adhere to new regulations regarding foreclosure procedures to help protect homeowners.
