In unveiling a landmark $25-billion settlement of investigations of foreclosure abuses, federal and state officials said Thursday they were holding the nation’s five largest mortgage servicers accountable for the problems while also providing help to up to 2 million homeowners affected by the collapse of the housing market.
"This isn’t just about punishing banks for their irresponsible behavior," Housing and Urban Development Secretary Shaun Donovan said at a Washington news conference. "It’s also about requiring them to help the people they harmed by funding efforts to help homeowners stay in their homes."
The deal between federal officials, attorneys general from California and 48 other states, and the five servicers -- Bank of America Corp., JPMorgan Chase Co., Wells Fargo Co., Citigroup Inc. and Ally Financial Inc. -- was completed after more than a year of negotiations to settle investigations into foreclosure improprieties, such as robo-signing.
"Today we pick up another piece of the wreckage caused by the foreclosure crisis,” said Illinois Atty. Gen. Lisa Madigan.
The settlement sets new national standards for mortgage servicing, to be overseen by an independent monitor, that officials said would end the frustrating runarounds by consumers who try to get their mortgages modified or make other changes.
But the deal goes beyond the foreclosure problems to try to stabilize the struggling housing market. In the second-largest multi-state settlement ever, the five servicers have committed to pump billions of dollars into programs to partially compensate people who lost their homes and to help current homeowners avoid that fate.
The deal includes $17 billion for relief to about 1 million current homeowners, the majority of which would come through reductions in the principal they owe on their mortgages. Another $5 billion in cash would go directly to California and the states as restitution for foreclosure paperwork problems and other improprieties by the servicers in the foreclosure process.
About $1.5 billion of that state money will be distributed directly to people whose homes were foreclosed from 2008 through 2011 and there was some operational problem, such as lost paperwork. Officials estimated hundreds of thousands of homeowners would get money as part of that settlement, though the average check would be $1,500 and $2,000.
Asked about the relatively small amount, Iowa Atty. Gen. Tom Miller said it is just one part of the settlement and is more than most of those homeowners could have expected to receive on their own.
"That homeowner that couldn’t get one dollar and they’re getting a check for $1,500, they’re not going to tell us we settled too cheap," said Miller, who led the negotiations for the state attorneys general.
Miller also said he expected that the large amount of write-downs on principal, which will take place as part of the settlement, will lead the practice -- resisted so far by servicers -- to become commonplace as banks and investors see it is not the money-loser they have feared.
California Atty. Gen. Kamala D. Harris, who was one of the last state holdouts, said the settlement will directly benefit hundreds of thousands of Californians.
Federal and state officials will try to get another nine large mortgage servicers to sign on to the settlement, which could increase the deal to $30 billion. The servicers will get various credits for actions they take as part of the settlement, including money spent, that will increase the total amount of assistance to homeowners.
The complex series of credits is designed to encourage the servicers to make payments over the next year to speed assistance to struggling homeowners and quickly aid the housing market. Under the deal with the five largest servicers, the credits could result in a total of $40 billion in relief to homeowners. If the other nine servicers sign on to the deal, the total relief could reach $45 billion.
Harris said Californians could receive up to $18 billion in assistance from the settlement.
U.S. Atty. Gen. Eric Holder said that while the settlement goes beyond the foreclosure abuses, it does not prevent federal and state officials from continuing to pursue investigations into actions that led to the collapse of the housing market.
"While today's agreement resolves certain civil claims based on mortgage loan servicing activities, it does not -- it does not -- prevent state and federal authorities from pursuing criminal enforcement actions," Holder said.
[For the record, 10:20 a.m. Feb. 9: An earlier version of this post said the mortgage foreclosure settlement totaled $26 billion, based on a figure from the Department of Housing and Urban Development. The department has revised the total to $25 billion.]