Struggling homeowners and victims of the foreclosure crisis could finally get a break from the bill collectors courtesy of big banks, federal officials announced Thursday.
A $25 billion settlement with the nation's largest mortgage servicers—Ally/GMAC, Citi, JPMorgan Chase, Wells Fargo, Bank of America—will provide "immediate relief" to Americans burned by the housing meltdown, Attorney General Eric Holder said in a press conference.
The agreement "holds mortgage servicers accountable for abusive practices" and is a step toward "righting the wrongs that led to our nation's housing crisis and economic collapse," Holder said. The settlement was prompted by an array of state and federal law suits against the lenders' alleged abusive foreclosure practices.
The agreement's impact on households is two-prong: part of the settlement helps people who've already lost their homes to foreclosure, and the other helps people struggling to keep their homes. Here's a look at the details of the settlement:
Principal reductions. According to the agreement, servicers must write down at least $17 billion dollars in principal reductions and other loan modifications. That means eligible homeowners—about 1 million according to HUD's estimate—could get thousands of dollars shaved off of their mortgage balance, which could help prevent more foreclosures down the road.
According to Iowa Attorney General Tom Miller, Bank of America in particular will have a "wide-open" loan modification plan.
Officials hope requiring loan modifications "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," according to a new web site set up to educate the public about settlement details.
Although the raw number is $17 billion, HUD secretary Shaun Donovan expects the actual benefit to homeowners to be much greater—in the ball park of $35 billion in relief. That amount could grow, he says, as more servicers are potentially added to the settlement terms.
But some observers wonder if the settlement is too little, too late. "It does move them closer to solvency, it moves that calendar, but you're still underwater," says Keith Gumbinger, vice president of mortgage information site HSH.com, emphasizing that an estimated 10 million Americans are "underwater," or owe more on their mortgages than their home is worth. "That's helpful but doesn't really solve much. It might pay rent for a month or two, but really doesn't change today's problem."
Refinancing help. Another $3 billion will be devoted to helping homeowners who, while current on their mortgage payments, are underwater on their loans. Refinancing at today's rock-bottom low rates would reduce monthly payments for homeowners, and help keep them out of delinquency and foreclosure.
Restitution. Americans who lost their homes to foreclosure also get a cut of the pie under the new agreement. Servicers will have to pay $1.5 billion to as many as 750,000 borrowers who lost their homes under banks' questionable foreclosure practices.
Under the terms of the settlement, borrowers seeking claims against banks would not have to prove financial harm and would not be barred from taking further legal action against banks.
"We can't undo the pain of this crisis by writing a check," Donovan said. "Holding these banks accountable is what this settlement is about. It's about requiring them to help the people they harmed."
It will take officials six to nine months to determine eligibility for homeowners and arrange payouts and loan modifications. The entire process is expected to take three years, according to the settlement information web site.
But serious obstacles remain, especially when it comes to portions that need congressional approval. Given that it's an election year, the Obama administration can expect no easy wins in Congress.