The Obama administration and 49 states announced on Thursday a record $25 billion mortgage settlement with the nation's five largest banks - the president's latest attempt to help homeowners and halt the still-sagging housing market's drag on the economy.
The deal, which stems from an investigation into foreclosure fraud launched in the fall of 2010, is the largest federal-state civil settlement involving a single industry since the 1998 tobacco deal.
It aims to benefit nearly 2 million current and former homeowners harmed by abusive mortgage and foreclosure practices during the past decade's housing boom and bust, by requiring banks to reduce some loans, send out checks to homeowners who have faced foreclosure, and refinance mortgages for underwater borrowers.
Among several forms of restitution, it will provide $1.5 billion in direct cash payments to an estimated 750,000 borrowers whose homes were improperly sold or taken into foreclosure between 2008 and 2011.
President Obama thanked Democratic and Republican attorneys general across the country for their work on the settlement, which he said will "begin to turn the page on an era of recklessness."
"It cost more than 4 million families their homes to foreclosure," he said of bad lending practices and foreclosure abuses. "These practices were plainly irresponsible, and we refused to let them go unanswered."
Under the terms of the settlement, the five largest mortgage servicers - Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial (formerly GMAC) - will provide $10 billion toward reducing the principal for borrowers who are delinquent or underwater and at risk of default. At least $3 billion will go toward refinancing, and billions more will be directed to state governments and the Federal Housing Authority, according to the Justice Department.
Details will be posted on the website NationalMortgageSettlement.com, and Attorney General Eric H. Holder Jr. encouraged residents of the states involved to visit the websites of their attorneys general as well.
Homeowners who participate in the settlement would still have the right to sue the banks.
Housing and Urban Development Secretary Shaun L.S. Donovan said the settlement would provide "immediate relief" to homeowners.
Mr. Donovan said government investigators spent more than 15,000 hours reviewing Federal Housing Administration files, uncovering evidence of "robo-signed" affidavits in foreclosure proceedings, deceptive practices in the offering of loan modifications, failures to offer nonforeclosure alternatives before foreclosing on borrowers with federally insured mortgages, and improper documentation filed in federal bankruptcy court.
New York and California were among the final holdouts, but both eventually joined the settlement. Only Oklahoma declined to sign on to the settlement.
A win for Obama?
For the past year, Mr. Obama has called for a mortgage-relief plan with the five largest banks in order to settle the investigation of foreclosure abuses. But the settlement's impact on the ongoing housing slump and its effect on the economy as a whole is anything but certain.
"It will help build a stronger housing market while keeping more people in their homes," said Michael Calhoun, president of the Center for Responsible Lending. "But it was never intended or able to provide a comprehensive remedy" to the many problems plaguing the housing market.
Millions of U.S. homeowners hold loans that exceed the value of their homes - an estimated $700 billion in negative equity collectively. So the deal's $25 billion in relief will make only a small dent.
But requiring the big banks to provide mortgage relief "could become a model for the rest of the market, especially Fannie Mae and Freddie Mac, which control 50 percent of the market," said Mr. Calhoun.
Liberal groups, who held up the settlement for weeks as they pushed for more concessions from the banks, complained that it does not go far enough. They urged the Obama administration and state attorneys generals to pursue criminal cases against the banks.
Criminal charges still possible
The settlement does not prohibit criminal actions in the future, but bars any further civil enforcement related to foreclosure-processing problems. Officials in California, which has by far the most mortgages in default and foreclosure nationwide, promised to be aggressive in pursuing further remedies.
Previous Obama administration efforts to ease the housing crisis have produced few tangible results. A plan he launched two years ago failed to meet its stated goal of helping as many as 3 million to 4 million struggling homeowners avoid foreclosure by modifying loans because falling home prices prevented many from being able to refinance, among other difficulties.
Last week, Mr. Obama unveiled another plan that would cost up to $10 billion to allow homeowners who owe more than their homes are worth to refinance their mortgages through the Federal Housing Administration.
The program would be funded through a new tax on banks and would benefit nearly 3 million homeowners.
Patrice Hill contributed to this report.
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