29 Mar Understanding the Mortgage Foreclosure Settlements
Nearly five years after the height of the subprime mortgage crisis that led to the current economic slump, mortgage servicers are still sorting through the ripple-effects. Earlier this year, ten of the country’s largest banks reached a settlement with federal regulators for foreclosure abuses in 2009 and 2010, while Bank of America reached a separate settlement with government-backed investment firm Fannie Mae.
Both settlements are part of continued efforts to ensure that banks’ wrongful actions in the mortgage meltdown don’t go unpunished. Though the settlements likely will not affect consumers directly, the hope is that more certainty about how banks will pay for their bad behavior will contribute to stability as the economy begins to recover.
Bank of America’s Settlement with Fannie Mae
The agreement between Bank of America and Fannie Mae addresses harm Fannie Mae suffered as a result of fraudulent mortgage practices committed by Countrywide, the subprime mortgage lender Bank of America acquired (along with its liabilities) in 2008.
From 2000 to 2008, Countrywide Bank sold thousands of home loans to Fannie Mae via mortgage backed securities. Mortgage backed securities are big bundles of home loans that banks sold to investors. The banks would get an immediate payout from the investors, and the investors made money over time as they received income from the mortgage payments.
According to Fannie Mae, Bank of America violated certain warranty agreements and made false representations that made the loans seem less risky – and thus more valuable – than they actually were. Instead of going to court, Bank of America agreed to pay Fannie Mae $3.6 billion in cash and repurchase some of the loans it sold to Fannie Mae for $6.75 billion. The settlement also releases Bank of America from any future liabilities that could arise out of the loans.
Outside of the settlement, Bank of America also sold $336 billion in loans it was servicing to specialty mortgage servicing firms like Nationstar Mortgage Holdings and Newcastle Investment Corporation, suggesting that the settlement is part of Bank of America’s attempt to retreat from the mortgage market.
The good news is that the bank is facing consequences for its fraudulent actions and the settlement brings some degree of certainty to the mess left in Countrywide’s wake. The bad news is that none of the money will go directly to the pockets of consumers that suffered from Countrywide’s questionable lending practices. In fact, the settlement as part of Bank of America’s retreat from the mortgage market may leave consumers worse-off because less competition could lead to higher prices.
The Foreclosure Settlement
The other settlement between multiple federal agencies and 10 major banks aims to compensate borrowers for the illegal foreclosure practices that the major banks participated in during the height of the housing crisis. The banks involved are Bank of America, Citigroup, Wells Fargo, JPMorgan Chase, MetLife Bank, PNC, Sovereign, Sun Trust, US Bank, and Aurora. Much of the illegal activity centered on the banks’ practice of robo-signing their foreclosure documents. For more information on robo-signing and some of the banks’ other foreclosure abuses, see our earlier post on the National Mortgage Settlement.
The Foreclosure Settlement requires the banks to pay $3.3 billion directly to consumers who were harmed by fraudulent foreclosure practices in 2009 and 2010. In addition, the banks must reserve $5.2 billion for loan modifications and loan forgiveness for current borrowers. Some of the $5.2 billion will also go towards forgiveness of deficiency judgments for borrowers who are foreclosed on, meaning that if the house sells for less than the amount due on the loan, the borrower will not be responsible for the difference.
The Foreclosure Settlement also ends the case-by-case reviews of individual foreclosures that an earlier settlement had required. The reviews were supposed to single out each instance of foreclosure fraud and pay each borrower relative to how they were harmed. The individual review process had already cost more than $1.5 billion and was criticized as being ineffective and inefficient.
Will you get a payout?
The $3.3 billion payout to consumers is supposed to provide quicker payouts to consumers than the independent reviews that were previously taking place. More than 3.8 million borrowers who were foreclosed on in 2009 and 2010 will be eligible for some form of compensation from the various banks involved. A payment agent will be designated by the banks to determine who is eligible for relief. Eligible borrowers will be contacted sometime in March, and do not need to do anything initially to apply for the aid. If you are eligible, you will receive a payout regardless of whether you filed for an earlier independent review or not.
The payouts will range anywhere from a $250 to $125,000 for the worst cases. A “worst-case scenario” would be a wrongful foreclosure where the bank had no legal right to foreclose on the home at all, for example if the borrower was never in default.
Many borrowers will be eligible for payouts up to $15,000. For cases similar to those we have successfully pursued, where the bank wrongfully denied an opportunity to modify the borrower’s loan or the failed to follow up with the borrower’s application, the could receive as much as $15,000, plus any equity in the home lost in a foreclosure. If the home wasn’t foreclosed on, the borrower could receive the amount of excess interest paid as a result of being denied a modification.
Most borrowers will receive much smaller payouts for violations like bank clerical errors, overcharging interest, or assessing improper fees during foreclosures. Some borrowers could get paid even if the banks didn’t do anything wrong at all. The details of the settlement still aren’t fully fleshed out, and we hope to learn more specific details in the near future.
Fortunately, the Foreclosure Settlement will not require borrowers to waive any private right of action they may have against their lender. The Independent Review Process that was available to borrowers previously will continue to remain open if borrowers bring specific complaints.
The payout scheme has the potential to be both good and bad. It is certainly a good thing that borrowers will be paid out more quickly and efficiently. However, many critics are arguing that the payouts simply aren’t enough, and we tend to agree. For many consumers, “clerical errors” or “improper fees” ended up being the tipping point that ultimately led to foreclosure. We question whether a few hundred dollars (or even a few thousand) is truly enough to remedy the harms that occurred.
As a side note, be on the lookout for scams offering to “get you paid” from the recent Foreclosure Settlement. Scammers often see news like this as a new opportunity to take money from unsuspecting victims. If anyone calls or solicits you asking for money to help you get a government payout, they are not a legitimate company. The banks decide who is eligible to get paid will contact you directly. The banks will already have your personal information, so DO NOT give out your social security number, bank account, or any other personal information over the phone.
What about loan forgiveness or modification?
The $5.2 billion that banks are supposed to set aside for loan forgiveness or modifications should help their current borrowers. Though the details are murky for now, the settlement appears to give banks some discretion on how to offer modifications or forgiveness. While we are certainly hopeful that these funds will provide meaningful relief to struggling borrowers, we have discussed potential drawbacks to loan modification programs here and here.
While lean on details at the moment, we are cautiously optimistic that the Foreclosure Settlement will bring real relief to borrowers who were hurt in the past or are struggling to pay their home loans right now.
Our firm has represented many homeowners in Chapter 13 Bankruptcies, that offer a way to stop the foreclosure process and catch up with a mortgage or get a modification. You can call us for a consultation at 919-313-4636.