Homeowners more deeply underwater on mortgages handled by five major U.S. banking firms are prime candidates for getting help from a $25-billion nationwide settlement over alleged foreclosure abuses.
That's because the settlement gives the nation's largest mortgage servicers more incentives to help those who owe 40% to 75% more than the value of their homes, according to details of the settlement filed Monday in U.S. District Court in Washington.
In a complex series of formulas designed to maximize the effect of the deal reached last month, banks will get more than six times the credit for reducing loans for severely underwater borrowers than they would for helping those who owe 5% to 15% more than the value of their homes.
The settlement, which is expected to be approved by a federal judge, would end nearly a year and a half of investigations by the Justice Department, the Housing and Urban Development Department and attorneys general in 49 states into botched foreclosure paperwork and mortgage servicing problems.
The agreement includes close oversight of bank compliance by a special monitor, with penalties of up to $1 million for first violations and up to $5 million for second infractions stemming from widespread failure to comply with specific terms.
Many details about the settlement with Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc. were not available until the paperwork was submitted to the court Monday.
California Atty. Gen. Kamala D. Harris called the settlement "one important stride in our ongoing efforts to address the mortgage and foreclosure crisis that has devastated too many California communities."
She estimated that it would provide $18 billion in benefits to Californians, including $8.9 billion in principal write-downs for 250,000 troubled homeowners, $3.5 billion in forgiveness of missed mortgage payments and penalties for 32,000 borrowers, and $3.1 billion in forgiven debt to 23,000 borrowers who will be allowed to sell their homes for less than the mortgage amount.
Even so, the settlement's effect on the housing market could be limited. Only customers of the five largest servicers are eligible for principal reductions, and only if their loan is not owned or backed by government-controlled mortgage financing firms Fannie Mae or Freddie Mac.
Those and other limitations mean that fewer than 5% of the nation's 11.1 million underwater homeowners would be eligible, according to an analysis by Ted Gayer, co-director of economic studies at the Brookings Institution.
The federal court filing revealed how the banks will be able to fulfill their requirements under the settlement, which focuses much more heavily on assisting struggling homeowners than on direct compensation to people who lost their homes through foreclosure.
Under the nationwide agreement, the banks will pay a combined $1.5 billion to people who lost their homes through the foreclosure process from 2008 through 2011 at least partly because of botched paperwork or other problems. About 750,000 homeowners would receive about $1,500 to $2,000 each.
The banks will provide about $20 billion worth of assistance to homeowners — $17 billion in principal reductions and $3 billion for refinancing.
The settlement provides credits for the banks toward fulfilling their settlement requirements for completing different types of assistance. Often, the banks would get less than $1 in credit for $1 in principal reduction, which state and federal officials said could amplify the amount of assistance actually provided to homeowners to about $35 billion.
The mortgage settlement filings also revealed that the allegations of wrongdoing by the banks went beyond the practice of so-called robo-signing, or pushing homes for foreclosure without properly processing or even sometimes reading the documents.
The documents filed Monday included a complaint alleging that the banks "engaged in a pattern of unfair and deceptive practices" in servicing mortgages, including failing to apply mortgage payments correctly, charging excessive fees and lying to borrowers.
The settlement outlines new mortgage servicing standards designed to prevent robo-signing and other problems.
The terms bind all the banks, but their effects tend to help some hard-hit states like California, Florida, Arizona and Nevada more than others because they have so many people with mortgages far greater than what their homes are worth.
Bank and government officials said California played a huge role in the final settlement by digging in its heels last spring when the banks were offering just $5 billion toward a settlement, with no principal reduction as a component.
Threatening to take its case to court, California refused to sign an agreement that did not contain substantial principal reduction, helping to create the pressure that led to the final settlement.
State and federal officials also demanded that Bank of America be part of the settlement because its handling of troubled borrowers was the most flawed among the major banks.
Officials said the BofA-serviced loans generated an outsized share of complaints about lost paperwork, unresponsiveness to homeowners and such tactics as telling borrowers they were good candidates for loan modifications while pressing at the same time for foreclosures.
Bank of America will reach out to about 200,000 underwater borrowers who may be eligible to have their mortgage balance reduced, BofA mortgage spokesman Rick Simon said.
The banks will be able to offset some of the costs of the settlement by passing losses on mortgage principal reductions on to investors holding the loans in securities. The banks own less than half the loans that they service, said Bert Ely, an independent banking analyst. But investors might not accept those losses without a fight, he said.
"I just wonder how much litigation is going to come out of this from the investor community. I think it's going to be huge," Ely said.
The Assn. of Mortgage Investors, a trade group representing institutional investors and others with stakes in mortgage-backed securities, complained Monday that they were not involved in the settlement negotiations.