$26 Billion Settlement Agreement Clears Five Mortgage Servicers

In February 2012, a $26 billion agreement was reached with the federal government and 49 state attorneys general and the nation’s five largest mortgage servicers – Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial Inc. (formerly GMAC).  Oklahoma was the only state not included in the agreement, because they reached a separate agreement with the banks worth $18.6 million.

This agreement addressed mortgage loan servicing and foreclosure abuses, new mortgage servicing standards and how the $26 billion would be distributed.  The abuse included banks using faulty documents to seize homes. To speed up the foreclosure process, some employees signed papers they hadn’t read or used fake signatures, which is also referred to as “robo-signing”.

Summary of terms

Bank of America will be responsible for $11.8 billion, Wells and JPMorgan Chase for $5.3 billion each, Citigroup for $2.2 billion, and Ally for $310 million.

Only customers of the five servicers are covered and had to be a customer from at least January 2, 2008 through December 31, 2011.

Borrowers whose mortgages are underwater (owe more on their mortgage than their home is worth) will be able to refinance, if they are current on their mortgage payment.

Approximately $1.5 billion of the settlement goes to those improperly foreclosed upon by these five servicers and will be issued checks between $1,800 and $2,000.

Those who need loan modification to remain in their homes will have their principal reduced by an average of $20,000 by the five servicers and will help them refinance their homes.

Together the five servicers are required to dedicate $21 billion toward forms of relief such as loan modification and $5 billion in cash to federal and state governments.

These obligations are to be fulfilled by the five mortgage servicers within three years. They are given incentives to provide relief sooner and those missing the deadline will large face cash penalties.

California and Florida will get the largest share of the money, followed by Arizona, Illinois and Nevada,

New standards

New standards were set up so that the abuse does not happen again.  The key ones are listed below:

Servicers cannot complete a foreclosure sale of a home, if a modification is being considered.

Servicers must review homeowners for loan modifications before they begin the foreclosure process.

Borrowers are to be informed of the reasons they were denied a loan modification.

Homeowners in default can’t be charged more than once in 12 months for property valuations or appraisals.

Servicers are to make more attempts to keep up homeowner insurance policies on delinquent loans.

Parties that attempt to foreclose must show they have legal authority to do so, and do the foreclosures properly.

It will take the remainder of this year before the borrowers’ impacted will begin getting offers from the five servicers.  Nine more mortgage servicers may be added, which will make the amount grow to $40 billion or possibly to $45 billion, if the banks participate fully.  This is the largest settlement ever. Will this give the relief that is needed?

Credit Expert Witness, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Civil Penalty, Financial, Money & Identity

This post was written by John Ulzheimer