Mortgage Settlement

Earlier this month, 49 state attorneys general and the federal government reached agreement on a joint state-federal mortgage settlement involving five major banks. The settlement will provide as much as $25 billion in direct payments to states and the federal government. The relief is supposed to go toward reducing payments to distressed borrowers but consumers are skeptical.

The five lenders involved in the mortgage settlement are Ally/GMAC, Bank of America, Citi, JPMorgan Chase, and Wells Fargo. State and federal investigations determined that the country’s five largest loan servicers’ routinely “robo-signed” foreclosure related documents. Pushing documents through foreclosure without verifying the facts is a violation of the law. The settlement provides benefits to borrowers whose mortgages are owned by the banks involved in the agreements.

Struggling homeowners are tired of hearing empty promises about relief programs only to find them too complicated or restrictive. This plan does have significant differences from previous programs so homeowners proceed with skepticism yet hopeful.

There are two distinguishing factors in this mortgage settlement from previous plans. The first is that it includes principal reductions; banks will be required to do partial loan forgiveness. This is huge for homeowners whose home value has dropped below what they owe on their mortgage.

Secondly, this settlement is the result of a federal investigation, and compliance is mandatory. Previous program solutions for struggling homeowners have all been voluntary. Secretary Shaun Donovan from Housing and Urban Development projects that 2 million families that could benefit from the settlement.

Even with forced compliance good news will not happen quickly. The complexity of the mortgage market and this agreement, which will be performed over a three-year period, will keep borrowers waiting to find out if they are eligible for relief. Maybe this program is not so different from those previously hyped after all.