Could mortgage deal help you?
A look at what a potential settlement could mean to borrowers, the housing market
After nearly a year of negotiations, federal and state officials and major mortgage servicers are moving closer to a multibillion-dollar settlement over alleged foreclosure and mortgage loan-servicing abuses. A deal could be finalized by early February, some officials say, although that’s not a certainty. And its terms could change.
Based on interviews with officials on both sides of the negotiations, USA TODAY reporter Julie Schmit explains what a potential settlement might include and what it’s likely to mean for borrowers and the housing market.
Q: What could a deal be worth?
A: It’s expected to range from $17 billion to more than $30 billion, but that will depend on how many state attorneys general sign on to it and how many servicers are part of it.
The five biggest servicers, Bank of America, Jpmorgan Chase, Citibank, Wells Fargo and Ally Financial, are in. Smaller ones are expected to join later.
California, the state with the most foreclosures, said last week that the proposed deal isn’t good enough. If California eventually supports a deal covering the five biggest servicers, a settlement is likely to hit $25 billion.
Q: How might $25 billion be spent?
A: Terms could change, but the pot is likely to include:
-$ 17 billion for loan modifications. About 60% would go to reduce what people owe on their home loans. Other funds would be used to assist short sales, in which lenders agree to let borrowers sell homes for less than they owe, and to give unemployed borrowers a reprieve from making mortgage payments.
-$ 3 billion to help homeowners refinance at about a 5.25% rate.
-$ 5 billion in cash. About $1.35 billion would be distributed by states to eligible borrowers who were victims of loan-servicing abuses by one of the five servicers and lost their homes in foreclosure in 2008 through 2011. The rest would fund state and federal housing initiatives.
Q: Will I have to prove I was hurt by a servicer’s misconduct?
A: Probably not. The five servicers will provide a list of people who lost homes in 2008-11, and they’ll be contacted. Borrowers will likely have to attest to having suffered a loan-servicing abuse.
Q: If I take this payment, could I still sue if I felt I was wronged?
A: Yes, either as an individual or as part of a class action. It’s also possible you could get restitution from a national review of foreclosures underway among 14 large servicers, including these five. That review is being overseen by federal banking regulators.
Specific amounts of compensation have not been announced. Find more information at this website: www. independentforeclosurereview.com.
Q: Who will get principal reductions?
A: Borrowers would have to be at least 60 days late on their mortgages as of a date that’s yet to be determined. They would also have to be underwater, meaning they owe more on their home than it’s worth.
And their state and servicer would have to be participants in the settlement.
Q: Who won’t have any chance of a principal reduction?
A: That would be most borrowers, including anyone current on a mortgage and people with loans owned or guaranteed by a government entity, including Freddie Mac, Fannie Mae or the Federal Housing Administration. They hold about 56% of existing home loans, says magazine Inside Mortgage Finance.
In a recent paper, the Federal Reserve estimated that 12 million mortgages are underwater, and 8.6 million of them are current on payments.
Q: What’s in the deal for people who are paid up?
A: Not much. If they still have loans above 5.25%, they might benefit from refinancing. Many underwater borrowers can’t do that now because they don’t have enough equity in their homes.
Market researcher Corelogic says almost 60% of residential mortgages were at interest rates above 5% as of November, even though current interest rates are more like 4%.
Borrowers who aren’t delinquent could benefit in an indirect way.
If the principal reductions help prevent foreclosures, that will mean fewer distressed homes for sale, which could help overall home prices.
Q: How much principal reduction are we talking about, and to how many borrowers?
A: Housing and Urban Development Secretary Shaun Donovan said in a recent speech that it could be 1 million borrowers. Numerous news accounts have said principal reductions would average $20,000.
But 1 million could be a high number, and $20,000 is likely to be low. The average underwater homeowner owes about $50,000 more than their home is worth, says economist Mark Zandi of Moody’s Analytics.
Q: Will I be able to apply for principal reduction or other help?
A: There won’t be a standard application process. But you’ll be able to request it from your servicer if you’re eligible to do so.
Q: When could modifications and payments begin? A: That’s hard to say. Once a deal is reached, assuming one is reached, servicers will launch their own programs to begin the modification process.
There will be deadlines in the agreement.
Q: Will the principal reduction be a big boost to the housing market?
A: Probably not, says Capital Economics economist Paul Diggle. Borrowers collectively owe $700 billion more on their mortgages than their homes are worth. The principal forgiveness is “not going to be enough to generate a significant and sustained housing market recovery,” Diggle says.
Q: How else could a settlement affect homeowners not in default now?
A: In addition to the financial penalties, the draft settlement includes 40 pages of standards governing future loan servicing and foreclosures. The standards are expected to be tougher than past ones and should improve consumer experiences.
“In many ways, that’s just as important as the money,” says Ira Rheingold, director of the National Association of Consumer Advocates.
Q: What will servicers have to do differently?
A: Servicers will be more restricted in their ability to carry out a foreclosure while someone is pursuing a loan modification. They will also be expected to adhere to more consistent time frames, for instance, as to how long they have to inform borrowers of decisions regarding loan modifications. Q: Who’ll check up on servicers? A: A monitor will be appointed who will work with a compliance committee of state and federal officials.
Q: Why haven’t all states agreed to this?
A: Some attorneys general have complained that the banks won’t be contributing enough to compensate for the harm done.
Others don’t want the settlement to protect banks from future litigation, including how risky loans were packaged and sold to investors. Attorneys general in California, Massachusetts, New York, Nevada and Delaware have all expressed concern about the settlement talks.
Q: How tough are the potential settlement terms on the banks?
A: Not very, says Paul Miller, banking analyst at FBR Capital Markets. The banks will largely be modifying loans they own themselves and some they service for investor owners. By modifying loans, the banks may reduce their future default rates.
“The loan modifications would be something the banks probably would’ve done on their own anyway,” Miller says.
Rheingold says any settlement will seem inadequate against the trillions in lost equity that resulted from the unprecedented collapse in home prices. He says that the state attorneys general — who started this process — were “filling a void left by the Obama administration’s failure to adequately address the crisis.”
Q: Will a settlement affect home prices?
A: Maybe. With a settlement — and clear servicing standards — some economists say servicers will foreclose on delinquent borrowers faster. More foreclosures on the market could affect home prices and delay the stabilization that some economists expect this year or next, Capital Economics says.