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National Mortgage Settlement May Not Help Struggling Homeowners
The U.S. government announced a settlement with the five largest mortgage lenders for the robo-signing scandal, but critics allege that the deal will not help struggling homeowners.

On February 9, 2012 the federal government announced that it had reached an agreement with the five largest mortgage lenders to settle the allegations of mortgage fraud stemming from the 2010 “robo-signing” scandal. Officials across the country had discovered that mortgage lenders had improperly documented ownership of debt during foreclosures and accused lenders of illegally cutting corners. The settlement is supposed to rectify the damage caused by the lenders' practices. Bank leaders and government officials believe that the settlement will both restore faith in the lending community and assist struggling homeowners. However, many critics are skeptical that the plan will substantially aid those facing foreclosure.

Settlement Details

After protracted negotiations, Ally Financial, Bank of America, Citibank, JPMorgan Chase and Wells Fargo agreed to pay over $5 billion in cash to various state governments. Additionally, the lenders promised to reduce principals for those homeowners who are underwater in their mortgages by $17 billion over the next three years. The banks have earmarked $3 billion for refinancing loans for those who qualify and will pay $1.5 billion to homeowners upon whom the lenders improperly foreclosed.

Criticisms of the Deal

Critics of the settlement have voiced concern that the banks got off too easily for their widespread abuses in foreclosures. The settlement money amounts to only about $2,000 per person affected by the banks’ actions.

Additionally, experts note that the $17 billion principal reduction is but a drop in the sea of underwater mortgages in the country. About 11 million homeowners are underwater in their mortgages for a combined total of $700 billion, according to Capital Economics in London. The settlement only addresses about 2.4 percent of the negative equity in the U.S. housing market.

Others allege that the deal is secretly a bank bailout. Reducing the number of mortgages that are underwater strengthens the banks’ portfolios of second mortgages and home equity loans — equal to about $400 billion. Those holdings are worthless if the primary mortgages on the residences securing the loans are underwater, so writing down principals of underwater mortgages actually benefits banks because it makes the second liens more valuable.

Many are also concerned that the settlement did not include any policing provisions. They cite recent examples where banks have promised to take prescribed steps to atone for abuses and have managed to avoid their obligations, as well as widespread reports that banks have not been cooperating with national and state foreclosure prevention and loan modification programs.

Keywords: foreclosure
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