People who say that the proposed $25 billion foreclosure settlement between states and five major lenders is near are perilously close to the boy who cried wolf, but this time a resolution may actually be near.
The question now becomes this: If/when this settlement passes, will homeowners receive any significant benefit?
On the surface, the question is a bit silly. One would expect homeowners to receive some kind of restitution for being wrongfully foreclosed on by banks like Bank of America, Citibank, Wells Fargo, JPMorgan Chase, and Ally Financial. Previous versions of the settlement, though, did little to assuage the doubts of consumer advocates – including several high-powered attorneys general involved in the negotiations.
The latest incarnation of the settlement does provide for some monetary compensation for homeowners who suffered as a result of the banks’ alleged practices, but former owners of home foreclosures will not get their homes back.
Of the $25 billion, approximately 68% of the amount - $17 billion – will be allocated toward principal reduction to help owners of distressed properties and underwater homes. Roughly 20% of the amount - $5 billion – will be targeted toward state and federal programs that include a provision to give roughly 750,000 Americans checks worth $1,800 apiece. The remaining amount - $3 billion, or 12% - will go toward assisting homeowners with refinancing their mortgage loans at a lower interest rate around 5.25% - higher than today’s incredibly low rates but lower than most of the interest rates for today’s outstanding loans.
There could also be measures of reform contained in the bill, but one of the most contentious measures – civil immunity for banks – is still very much on the table and a real possibility. Limited criminal immunity may also be included, but banks will be vulnerable to some legal action by the states. Already several states have promised to initiate investigations into faulty foreclosure processes, including Delaware, New York, and Massachusetts.
In the end, if the settlement passes, nearly a million Americans could see a $20,000 reduction in their principal balances on their loans. That will help some homeowners, but large swathes of underwater and distressed homeowners will not receive any benefit from the settlement.
Since this is an election year, the Obama administration will likely pressure all sides to make this latest itineration of the settlement the final one. Even if states decide to not sign the agreement, it will likely pass – still leaving the door open for major legal battles down the road.
