Thursday, February 09, 2012

Reviewing the National Mortgage Settlement

The federal government and the attorneys general of forty nine different states (all of them, except for Oklahoma) reached a historic settlement earlier with the five largest mortgage service providers to address many of the illegalities that led to the mortgage crisis. Borrowers whose loans are serviced by Ally/GMAC, Bank of America, Citi, JPMorgan Chase, and Wells Fargo are all affected by this settlement.

Since the Warrendale neighborhood was quite literally the epicenter for the mortgage crisis in southeastern Michigan, I wanted to take a moment to review what this means for homeowners in our area.

Immediate Aid to Homeowners Needing Loan Modifications
This includes a good deal of homeowners in the Warrendale area. This portion of the settlement includes both first and second lien principal reduction.  The five banks are required to work off up to $17 billion in principal reduction and other forms of loan modification relief nationwide.

State attorneys general anticipate the settlement’s requirement for principal reduction will show other lenders that principal reduction is one effective tool in combating foreclosure and that it will not lead to widespread defaults by borrowers who really can afford to pay.

Aid to Borrowers With Mortgages That Exceed Their Home’s Value
This is another common situation in Warrendale, since housing prices have dropped 80% in the past few years. Under this settlement, borrowers will be able to refinance at today’s historically low interest rates. The five banks are required to provide up to $3 billion in refinancing relief nationwide.

Other Key Provisions of the Settlement
This settlement will provide immediate payments to borrowers who lost their homes to foreclosure with no requirement to prove financial harm and without having to release private claims against the servicers or the right to participate in an OCC review process. $1.5 billion will be distributed nationwide to 750,000 borrowers.

It further provides immediate payments to the forty nine states to help fund consumer protection and state foreclosure protection efforts.

The settlement also calls for the first ever nationwide reforms to servicing standards. This is something that no federal or state agency has been able to achieve. These servicing standards require single point of contact, adequate staffing levels and training, better communication with borrowers, and appropriate standards for executing documents in foreclosure cases, ending improper fees, and ending dual-track foreclosures for many loans.

Oversight of national banks by state attorney generals for the first time. This is something that no court could award.

National banks will be required to regularly report compliance with the settlement to an independent, outside monitor that reports to state attorneys general. The banks will have to pay heavy penalties for non-compliance with the settlement, including missed deadlines.

This agreement holds the banks accountable for their wrongdoing on robo-signing and mortgage servicing.  This settlement does not seek to hold them responsible for all their wrongs over the  years and the agreement and its release preserve legal options for others to pursue.

Specifically, the settlement announced earlier today does not: 
  • Release any criminal liability or grant any criminal immunity;
  • Release any private claims by individuals or any class action claims;
  • Release claims related to the securitization of mortgage backed securities that were at the heart of the financial crisis;
  • Release claims against Mortgage Electronic Registration Systems (MERS);
  • End state attorneys general investigations of Wall Street related to financial fraud or the financial crisis.  
The agreement settles only some aspects of the banks conduct related to the financial crisis (foreclosure practices, loan servicing, and origination of loans) in return for the second largest state attorneys general recovery in history and direct relief to distressed borrowers while they can still use it. 

State cases against the rating agencies, as well as cases related to bid-rigging in the municipal bond market, will continue unimpeded by this settlement. Claims and investigations against MERS and how Wall Street packaged mortgages into securities will also continue.

On January 27, U.S. Attorney General Eric Holder along with U.S. Housing and Urban Development Secretary Shaun Donovan, Securities and Exchange Commission Director of Enforcement Robert Khuzami and New York Attorney General Eric Schneiderman announced the formation of the Residential Mortgage-Backed Securities Working Group.  The working group will investigate those responsible for misconduct contributing to the financial crisis through the pooling and sale of residential mortgage-backed securities.

More information about the National Mortgage Settlement is available here.

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