Gov’t announces $25 billion settlement with mortgage companies

In what is the largest federal-state civil settlement ever reached, five mortgage companies -- Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial (formally GMAC) -- have agreed to spend $25 billion to address concerns regarding their foreclosure procedures.

Yesterday's announcement comes after some of the nation's largest lenders were accused of violating state and federal law. As a result, those who lost their homes to foreclosure may receive cash payments while those who are currently "underwater" may have the opportunity to refinance at today's historically low mortgage rates.

Deceptive practices in question

After the housing market collapse, many homeowners found they had negative equity in their homes, also known as being underwater. With the subsequent recession, many borrowers found they were unable to make mortgage payments. However, they were also unable to sell their homes. As a result, foreclosures skyrocketed near the end of the last decade.

While consumer protections were put in place to help homeowners avoid foreclosure, the government determined some mortgage lenders acted deceptively and failed to follow proper procedures. In announcing the settlement, the Department of Justice cited the following violations:

• 'Robo-signed' affidavits for foreclosure proceedings
• Deceptive practices in offering loan modifications
• Failure to offer non-foreclosure alternatives to borrowers with federally-insured mortgages
• Improper documentation filed in federal bankruptcy court

Mortgage settlement terms

"This historic settlement will provide immediate relief to homeowners -- forcing banks to reduce the principal balance on many loans, refinance loans for underwater borrowers, and pay billions of dollars to states and consumers," said HUD Secretary Shaun Donovan in a press statement. "Banks must follow the laws. Any bank that hasn't done so should be held accountable and should take prompt action to correct its mistakes."

The mortgage settlement creates a $1.5 billion fund to repay those who lost their homes to foreclosure from January 1, 2008 to December 31, 2011. The payment amount will vary depending on the number of individuals making claims from the fund, but it is estimated those eligible will receive checks for up to $2,000. Individuals should contact their bank to determine eligibility.

In addition, the participating lenders have agreed to devote $17 billion to providing mortgage relief to underwater homeowners and those behind on their payments. It is expected that those eligible for this program could see their principal reduced by an average of $20,000 per borrower. Those not eligible for a principal reduction may be able to tap into the $3 billion earmarked toward allowing homeowners to refinance at today's lower interest rates.

The settlement will be executed over a three-year period. Oklahoma chose to pursue its own settlement with lenders, and residents there are not eligible for the provisions of the national settlement.

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