The $25 billion mortgage-servicing settlement that federal and state prosecutors announced on Thursday with the nation’s largest lenders is a much-needed boost to the Obama administration’s dismal housing scorecard.
Although much of the initial grunt work to investigate and hold lenders accountable for questionable foreclosure practices was undertaken by ambitious and frustrated state attorneys general, such as Iowa’s Tom Miller, pressure from the administration and negotiations by regulators at the Justice and Housing and Urban Development departments played a major role in closing the deal and persuading wayward and significant states such as California and New York to sign on.
After being beat up repeatedly for poor performance in addressing housing-market woes, in which President Obama himself has acknowledged failure, the administration can now show it helped secure billions of dollars for struggling homeowners--money that comes from lenders rather than the federal government. And the White House can tout the settlement as evidence that it is holding lenders accountable for cleaning up the foreclosure processing system going forward.
In fact, Obama framed Thursday’s announcement as the most recent in a series of “we can’t wait” initiatives the administration has undertaken without congressional approval. He called on Congress to do more to fix the broken housing market.
“To build on this settlement, Congress still needs to send me the bill I've proposed that gives every responsible homeowner in America the chance to refinance their mortgage and save about $3,000 a year,” Obama said. “It's only going to happen if Congress musters the will to act.”
More than a million homeowners could benefit from the settlement. But they are a relatively small percentage of the market, and even those borrowers who will receive restitution will not be made whole. The deal, importantly, does not apply to the vast majority of loans held by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that dominate the market.
All states except Oklahoma, which reached a separate agreement with the five lenders, signed on, clearing up some of the legal uncertainty hanging over banks and tying up capital that could be used to reenergize the housing market. But the agreement does not remove all the uncertainty. In fact, other legal action is expected soon, as the Obama administration aims to show fresh resolve to fix the housing crisis and hold the financial sector responsible for suspected wrongdoing. The next big effort will address problems relating to the origination and packaging of mortgage-backed securities, which helped fuel the crisis and are the focus of a new mortgage-fraud task force within the Justice Department.
“Make no mistake, we are not done,” said an administration official, speaking on condition of anonymity.
The settlement is the second-largest civil settlement after a 1998 tobacco case, according to the administration. It resolves servicing issues with Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial, and it could grow to include nine more.
Because so many homeowners owe more than their homes are worth, lenders will not get dollar-for-dollar credit in what they pay to satisfy the settlement. Administration officials said that to satisfy the $25 billion agreement, lenders might have to pay as much as $40 billion. And if prosecutors can expand the deal to encompass nine more lenders, for a total settlement figure of $30 billion, that could cost lenders as much as $45 billion.
Under the terms of the initial deal with the top five lenders, $17 billion will provide direct relief to an anticipated 1 million borrowers or more, with 60 percent of those funds dedicated to principal reductions. The principal relief is an attempt to forestall foreclosures, so it will be targeted at borrowers who are deeply underwater and those who are delinquent. Lenders can also pursue other options, including short sales, loan modification, and forbearance, when deciding the most advantageous way to handle a given loan.
Also under the agreement, $5 billion would be doled out to states to set up foreclosure prevention programs, with $1.5 billion of that total designated for payments to borrowers who lost their homes between 2008 and 2011. The cash payments of between $1,500 and $2,000 are expected to reach hundreds of thousands more homeowners.
Another $3 billion provides refinancing for borrowers who are current on their loans modeled after the federal government’s Home Affordable Refinancing Program, and $1 billion is meant to resolve origination problems with loans that are backed by the Federal Housing Administration.
The settlement also provides a model for reforming servicing standards and providing principal reductions.
HUD spokesman Derrick Plummer said that although the deal stood at just over $25 billion on Thursday, it is expected to reach $26 billion in the coming days. It is unclear which developments are expected to raise the agreement by $1 billion.
The deal will be submitted to the courts for approval in a few weeks. After that, the banks have three years to pay out the settlement, but there are incentives for them to deliver funds in the first year to maximize relief to borrowers.