Mortgage Settlement Agreement Explained

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  Download the table: "State Foreclosure, Delinquency and Negative Equity Rates"

A settlement between U.S. states and the nation’s largest mortgage lenders over foreclosure abuses is a go as every state but one—Oklahoma—has signed on to the deal. The settlement is described by U.S. Attorney General Eric Holder as the “largest joint federal-state civil settlement in the history of this nation."

  • About one in five Americans with mortgages owe more to the bank than their home is worth, with collective negative equity sitting around $700 billion. On average, negative equity homeowners are underwater by $50,000 each.
  • According to the Mortgage Bankers Association, approximately 1.5 million homeowners are 90 days or more delinquent on their mortgages but not yet in foreclosure.
  • Since the beginning of 2007, approximately 4 million homeowners have entered into the foreclosure process amidst the biggest housing downturn since the Great Depression.
  • As the housing market crashed, banks began foreclosing on a massive scale and stories began to surface that banks were foreclosing on homeowners using improper procedures or paperwork. In response, all 50 state attorneys general joined an investigation into the mortgage servicing practices of major banks that allegedly misdated documents, used “robo-signing,” and engaged in other fraudulent and semi-fraudulent practices. Robo-signing is the term used to describe when a mortgage servicing company does not review or verify foreclosure documents before signing them and moving forward with foreclosure proceedings.
  • Since October 2010, state attorneys general, regulators and federal officials have been discussing a settlement with several big banks to compensate homeowners for damages arising from improper foreclosure procedures and to provide to relief to states and homeowners from underwater mortgages.
The Deal
  • The settlement is between 49 state attorneys general, the Justice Department, the U.S. Department of Housing and five major banks: Ally Financial Inc., Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co., and Wells Fargo & Co. 
  • The exact value of the settlement is unclear, but could range from $26 billion to upwards of $39 billion. Money will be distributed based on a complex formula set forth in the agreement, and the total settlement value will ultimately depend on a number of factors. 
  • The deal does not affect an individual’s ability to pursue private legal action in the future, nor does it prevent state and federal authorities from pursuing criminal enforcement actions or interfere with their ability to move current investigations forward, according to Holder.
  • The deal establishes a monitor to track compliance with the terms of the agreement. Banks that violate the terms of the deal face penalties of $1 million per violation and up to $5 million for repeat violators.
  • Three states—New York, California and Massachusetts—have specifically reserved the right to pursue or continue to pursue separate litigation.
  • The deal has four primary components: principal reduction, refinancing, payments to foreclosed homeowners and payments directly to states.
Principal reduction: $17 billion-$32 billion
  • At least $17 billion will be allocated to mortgage debt forgiveness, forbearance, short sales and other assistance to homeowners, primarily by reducing the principal on mortgages that are both underwater and delinquent. The settlement could provide up to $32 billion in direct benefits to borrowers through settlement-related credits.
  • This component of the settlement could assist up to 1 million homeowners.
Refinancing: $3 billion 
  • Officials report that up to 750,000 homeowners who are underwater but still current on their mortgages will be granted relief in this component of the settlement, worth about $3 billion.
  • Although these homeowners will not see their principal reduced, they will be able to refinance their mortgages at the current, near record low, interest rates.
Payments to foreclosed homeowners: $1.5 billion
  • Approximately $1.5 billion is allocated to go to homeowners who had their homes foreclosed upon between Jan. 1, 2008, and Dec. 31, 2011, using the improper procedures for which banks were originally investigated, and who meet certain other criteria.
  • Each homeowner in this category will receive up to $2,000.
Payment to states and the federal government: $3.5 billion
  • States will receive $2.75 billion and the federal government will receive $750 million. The state funds will help fund consumer protection and state foreclosure protection efforts.
State-by-State Benefit Estimates
  • Most state attorneys general have already estimated the total benefit their states will receive, including homeowner relief (loan modifications, principal reductions, direct relief etc.), refinancing for underwater borrowers and direct cash payments to state government.
  • States that were hit harder by the housing downturn – like California, Nevada and Florida – will receive a larger chunk of the settlement. California, for example, could receive up to $18 billion in benefits, more than any other state.
  • Nevada Attorney General Catherine Cortez Masto has estimated her state will receive around $1.5 billion in benefits and Florida is estimated to receive $8.4 billion.
  • On the other end of the scale, states with fewer distressed homeowners and lower foreclosure or underwater mortgage rates will receive less. For example, Wyoming and Alaska will receive around $10 million each in total benefits.



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