Foreclosure Settlement Makes it to Federal Court for Approval

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In what comes as a relief for the country’s 5 biggest mortgage servicers – and their investors – the U.S. Justice Department filed proposed settlements for Bank of America (NYSE:BAC), Citigroup (NYSE:C),  JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC) and Ally Financial in federal court on Monday. [1]

The $25 billion settlement took a long time being finalized, largely because certain states which opposed the idea of capping the mortgage-related liability of these financial institutions. The immense public sentiment against the banks over faulty mortgage documentation and foreclosure practices is evident from the fact that 49 states and various federal agencies are parties to this settlement. Investors in these banks can now breathe a little easier as the settlement helps move past the overhang over the mortgage business that could potentially have cost a great deal more than the final settlement amount.

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What Complaints Does the Settlement Address?

According to the proposal filed by the U.S. Justice Department, the settlement seeks to reach a closure on the following alleged violations of state and federal laws by the banks: [2]

  • Bank employees indulged in “robo-signing” – wherein they approved documents without a proper review
  • The banks charged borrowers excessive or improper fees
  • The banks did not apply borrower loan payments properly
  • The banks wrongfully denied borrowers loan modifications
  • The banks misled homeowners with inaccurate information forcing foreclosures
  • The banks abused the bankruptcy process and filed fraudulent reimbursement claims with the FHFA

As we saw in various previous settlements from the banks, they have neither accepted nor denied being guilty on all the above mentioned charges.

How Will Those Affected See This $25-Billion Benefit?

Of the $25 billion settlement, a sizable $5 billion will go to federal and state coffers as fines. Of the remaining $20 billion, a sum of $17 billion will be set aside to provide principal relief and other assistance to affected borrowers. The remaining $3 billion will help thousands of homeowners clinch a new refinanced mortgage deal with their respective bank.

Bank of America, which will contribute to a majority of the $25 billion has Countrywide largely to thank for the misfortune. Countrywide was singled out by the U.S. Justice Department for its wide-spread misrepresentation of loans to the FHFA immediately following the housing bubble burst in 2008.

Besides the settlement amount, the banks are expected to track their performance on various parameters laid out as a part of the settlement on a quarterly basis. A failure to meet these disclosure criteria would see the banks attract addition penalties to the tune of $1 million for each violation.

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Notes:
  1. Foreclosure Settlement With Banks Filed in Federal Court, Bloomberg Businessweek, Mar 12 2012 []
  2. Foreclosure Pact Alleges a Pattern of Malfeasance, The Wall Street Journal, Mar 12 2012 []