President Obama today announced a $25 billion "landmark agreement" between the Federal Government, the State Attorney Generals, and five of the biggest mortgage lenders (Bank of America, Ally Bank, JP Morgan Chase, Citicorp, and Wells Fargo. Under the terms of the agreement, the banks will provide foreclosure reliefe and also clean up their mortgage foreclosure and servicing practices in return for being able to restart the foreclosure process.
How this Benefits Homeowners
If you are underwater on your mortgage or having difficulty making payments, this plan may provide you with some assistance. Unfortunately, it's not entirely clear yet who will benefit. The webpage for the settlement says the following:
"Because of the complexity of the mortgage market and this agreement, which will be performed over a three-year period, borrowers will not immediately know if they are eligible for relief."
Three classes of homeowners stand to benefit in the future. They are:
- Homeowners needing loan modifications now, including first and second lien principal reduction. The servicers are required to work off up to $17 billion in principal reduction and other forms of loan modification relief nationwide.State attorneys general anticipate the settlement’s requirement for principal reduction will show other lenders that principal reduction is one effective tool in combating foreclosure and that it will not lead to widespread defaults by borrowers who really can afford to pay.
- Borrowers who are current, but underwater. Borrowers will be able to refinance at today’s historically low interest rates. Servicers will have to provide up to $3 billion in refinancing relief nationwide.
- Borrowers who lost their homes to foreclosure with no requirement to prove financial harm and without having to release private claims against the servicers or the right to participate in the OCC review process. $1.5 billion will be distributed nationwide to some 750,000 borrowers.
Oklahoma did not join the settlement and residents of the state are not eligible to receive compensation.
In addition to the provisions for homeowners, the agreement stipulates increased regulation. The banks have agreed to implement servicing standards to improve communication with homeowners, mortgage documents, foreclosure documents, fees, and dual track foreclosures.
State Attorney Generals will also gain oversight over national banks. The banks will be required to submit reports to an outside monitor who reports to the AGs in order to monitor compliance with the agreement. If a bank is not found compliant, it will have to pay heavy fees.
For the Banks
At first, this seems like a loss for the banks. But in reality, it is good news. The banks have already written down many of their loans and this allows the foreclosure process to start again and removed uncertainty, which has depressed bank stock prices. It does mean more compliance but my guess is that bank monitoring will not be vigorous over time. As we've seen in the past, compliance issues have a way of weakening and fading as priorities shift.
For the Housing Market
As the logjam over foreclosures is cleared, expect to see more houses on the market. This will temporarily lower home prices in many cities but in the long-run may help to clear the market and help it heal.