The nation's five largest mortgage lenders have agreed to overhaul their industry after deceptive foreclosure practices drove homeowners out of their homes, government officials said Monday.
A draft settlement between the banks and U.S. states has been sent to state officials for review.
Those who lost their homes to foreclosure are unlikely to get their homes back or benefit much financially from the settlement, which could be as high as $25 billion. About 750,000 Americans about half of the households who might be eligible for assistance under the deal will likely receive checks for about $1,800.
But the agreement could reshape long-standing mortgage-lending guidelines and make it easier for those at risk of foreclosure to restructure their loans. And roughly 1 million homeowners could see the size of their mortgage reduced.
Five major banks - Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial - and U.S. state attorneys general could adopt the agreement within weeks, according to two officials briefed on the discussions. They spoke on the condition of anonymity because they are not authorized to discuss the agreement publicly.
The settlement would be the biggest of a single industry since the 1998 multistate tobacco deal. And it would end a painful chapter that grew out of the 2008 financial crisis.
Nearly 8 million Americans have faced foreclosure since the housing bubble burst. In some cases, companies that process mortgages failed to verify the information on foreclosure documents. The worst practices, known collectively as "robo-signing," included employees signing documents they hadn't read or using fake signatures to sign off on foreclosures.
President Obama is expected to tout the settlement in his State of the Union address Tuesday. His administration has put pressure on state officials to wrap up a deal more than a year in the making.
But some say the proposed deal doesn't go far enough. They have argued for a thorough investigation of potentially illegal foreclosure practices before a settlement is hammered out.
New York, Delaware, Nevada and Massachusetts have argued that banks should not be protected from future civil liability. The deal will not fully release banks from future criminal lawsuits by individual states.
A signed deal is not expected this week, said Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller, who has led the 50-state negotiations. Mr. Greenwood said late Monday that there are "terms we must still resolve."
The settlement would only apply to privately held mortgages issued between 2008 and 2011, not those held by government-controlled Fannie Mae or Freddie Mac. Fannie and Freddie own about half of all U.S. mortgages, roughly about 31 million U.S. home loans.
As part of the deal, about 1 million homeowners could also get the principal amount of their mortgages written down by an average of $20,000. One in four homeowners with a mortgage or roughly 11 million people owe more than their home is worth. These so-called "underwater" borrowers have little chance at refinancing.
Under the deal:
$17 billion would go toward reducing the principal that struggling homeowners owe on their mortgages.
$5 billion would be placed in a reserve account for various state and federal programs; a portion of that money would cover the $1,800 checks sent to those homeowners affected by the deceptive practices.
$3 billion would help homeowners refinance at 5.25 percent.