By BPE Attorneys with special thanks to Keith Dunnagan
Lenders Settle with Government in Foreclosure Abuse Investigation
Nearly two years ago the State’s Attorneys General across the country along with Federal Officials collectively began to investigate the largest lenders regarding the foreclosure practices of the banks. As you may recall, this investigation got a huge boost in late 2010 when it was discovered that many lenders were just ramming foreclosures through process with no oversight to insure that the process was being carried out in conformance with the law. This led to among other things – the robo-signing scandal – where lenders had processors continually signing various foreclosure documents with falsified and fraudulent verifications that was being attested to was indeed correct. This scandal led to short suspension of foreclosures in late 2010 but by early 2011 the lenders foreclosure mills were up and running again at full speed with not much change in the process or oversight.
In response, the Attorneys General of many States filed lawsuits against the largest banks and, since then, have been negotiating a Settlement. Many of these abuses continue today with no real help coming from the lenders. Yet this potential settlement between the Government and the largest lenders is billed as a watershed moment for homeowners. The details of the agreement are still coming out but here is what we know so far.
It appears based on the information that has been released to the public that the total settlement package is valued at about $25 billion. Based on the information the plan appears to earmark at least $10 billion dollars for modifications and principal reductions for about 1 million homeowners. $450 million of this is being given to California. With 2 million upside down owners, that equals about $213 per homeowner. Others estimate the potential savings per homeowner at $20,000, but with the average being $50,000 upside-down, this won’t make a huge dent. Another, $3 billion is earmarked for refinancing of mortgages, some which may be underwater mortgages. And another $1.5 billion will pay up to $2,000 to about 750,000 homeowners that were improperly foreclosed upon. The remaining money – $10.5 billion – will be distributed to the States and Federal Governments to compensate the participating governmental entities for loss of public funds as it relates to the servicer misconduct. At this point, only Oklahoma has opted out.
While this has initially been heralded as a good deal for the homeowner, the reality is that it is not at all likely to make any signficant difference. $2,000 will not reasonably compensate the people who have wrongfully lost their homes; a $20,000 principal reduction will not enable most upside-down owners to afford their loans. Nearly 50% of the settlement monies are headed directly to the government coffers bot to affected homeowners. We have seen this happen before. In December of 2008, after 11 states filed a class action against Countrywide for violations of lending practices, the government settled the matter, directed Countrywide to modify the subprime loans that they had sold during the bubble, but built an escape clause based on the net present value (NPV) of the loan. By including such a component, the programs were essentially designed to fail… and there was no enforcement ability when they did fail.
This settlement may be much more of a gift to lenders. Five banks will share liability for $25 billion. Yet the banks had income of $317 billion last year alone. The banks have 3 years to perform, and notification of the Program to affected homeowners may not occur for up to 9 months. Worst of all, this Settlement will have no affect on FNMA and Freddie Mac loans which account for 80% of the subprime loans out there. Finally, by the Settlement, lenders will gain immunity from any further Attorney General suits concerning the robo-signer scam. This sounds very much more like a lender win than any real hope for homeowners.
Questions remain as to what the specifics of the settlement are and what will actually be required by the lender and how effective are the penalties to deter the banks future intransigence in processing and working with borrowers on loan modifications and principal reductions. The reality is homeowners do not need assistance in 3 years, they need it now.
While it remains to be seen as to what the actual settlement will say and what it will require – one thing is for sure, if the settlement agreement limits enforcement rights to only the participating governmental entities and does not contain a right of private enforcement, ie. if the homeowners are not allowed to use the settlement as a basis for litigating and protecting their rights in a Court of Law, the settlement will more than likely be as impotent and ineffective as the Countrywide settlement, HAMP, HAFA, TARP, Hope for Homeowners and every other mortgage relief program that has been put in place in the last four years to help.
