Mortgage Settlement Agreement

Five Banks Agree To Pay $25 Billion To Settle Mortgage Abuses

African Americans have been disproportionately hurt by the mortgage foreclosure crisis, but it is not clear how much they will be helped by this deal.

By Frederick H. Lowe
Federal and state officials last week signed a $25 billion settlement agreement with five of the nation's largest banks relative to mortgage loan servicing and mortgage foreclosure abuses, but it is not clear how many black homeowners will be helped by the deal, said a spokesperson for the Center for Responsible Lending.

"We know that African-Americans and Hispanics have been disproportionately hurt by the foreclosure crisis, but the agreement only affects mortgages banks have held on their books, not ones sold into the secondary mortgage market to Freddie and Fannie," said Kathleen Day, spokesperson for the Washington, D.C. office of the Center for Responsible Lending (CLR), a nonpartisan research group that protects home ownership and family wealth.

Banks keep high-risk “jumbo loans” on their books, said a spokesperson for the Mortgage Bankers Association, which represents the real estate finance industry.

The Federal Home Loan Mortgage Corporation, known as Freddie Mac, and the Federal National Mortgage Association, known as Fannie Mae, purchase prime mortgages in the secondary market, package them and sell them to investors. Loans insured by the Federal Housing Finance Agency also are not included in the agreement, said the Mortgage Bankers Association spokesperson.

Day said the agreement will affect 8 percent to 18 percent of mortgages held by Bank of America, JPMorgan Chase & Co., Wells Fargo, Citigroup Inc., and Ally Financial Inc. The agreement applies to mortgages that were sold by banks in 49 states and Washington, D.C.

U.S. Attorney General Eric Holder, U.S. Secretary of Housing and Urban Development Shaun Donovan, and attorneys general from Colorado and Iowa announced on Thursday, Feb. 9, that state and federal officials reached the agreement with the five banks that provides homeowners financial relief and establishes new homeowner protections in the future.

"It holds mortgage services accountable for abusive practices and requires them to commit more than $20 billion toward financial relief to consumers," Holder said during a news conference in Washington, D.C. "As a result, struggling homeowners throughout the country will benefit from reduced principals and refinancing of their loans. The agreement also requires substantial changes in how servicers do business, which will ensure the abuses of the past are not repeated."

According to the agreement, the servicers are required to dedicate collectively $20 billion toward various forms of relief to borrowers. At least $10 billion will go to reducing the principal on loans for borrowers who, as the date of the settlement, are either delinquent or at imminent risk of default and owe more on their mortgages than their homes are worth.

At least $3 billion will go toward refinancing loans for borrowers who are current on their mortgages but who owe more on their mortgage than their homes are worth.  Up to $7 billion will go toward other forms of relief, including forbearance of principal for unemployed borrowers, benefits for service members who were forced to sell their home at a loss as a result of a permanent change in station order and other programs.

In addition, the agreement requires servicers to pay $5 billion in cash to federal and state governments. Some $1.5 billion of this payment will be used to establish a Borrower Payment Fund to provide cash payments to borrowers whose homes were sold or taken in foreclosure between Jan. 1, 2008, and Dec. 31, 2011.

The settlement  will be filed as a consent judgment in the United States Court for the District of Columbia and will remain in effect for 3½ years.

Joseph A. Smith, Jr., who has served as North Carolina Commissioner of Banks since 2002, will serve as the agreement's independent monitor. Smith will be able to impose penalties of up to $1 million for each violation and up to $5 million for certain repeat violations.

In the past, banks have signed agreements regarding mortgage abuse only to ignore them, Day said. "This agreement has a strong enforcement arm," she added.

African-American home owners have been hit hard by mortgage foreclosures and more are still struggling to hold onto their homes.

The Center for Responsible Lending published in November 2011 a study titled, "Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures." The study provided a snapshot regarding mortgages issued from 2004 through 2008.

It reported that 396,824 African Americans had lost their homes through foreclosure, which is larger than the population of New Orleans. In 2010, 343,829 residents lived in New Orleans.

The Center for Responsible Lending also reported that 572,249 African-American home owners were seriously delinquent –60 or more days behind—on their mortgage payments.

Foreclosures also depreciate the value of nearby properties. The center reported in June 2010 that between 2009 and 2012, an estimated $194 billion was drained from the black community because of foreclosures.