In February 2012, state and federal governments reached an agreement with the country’s five largest loan servicers, offering a glimmer of hope for property owners who are facing foreclosure. The effected banks are Ally/GMAC, Bank of America, Citi, JPMorgan Chase, and Wells Fargo. This is often referred to as the “National Mortgage Settlement.” Borrowers whose homes are owned or serviced by the settling banks may be eligible for benefits such as:
- Principal reductions for homeowner seeking loan modifications,
- Refinancing at low interest rates for borrowers whose mortgages exceed home value, and
- Payments to some borrowers who lost their homes to foreclosure.
Banks were required to offer up to $17 billion in principal reductions and other loan modifications, $3 billion in refinancing relief, and $1.5 billion to homeowners who lost their homes.
The settlement also provides for regulation of the settling banks by:
- Setting standards for servicer staffing and training levels,
- Setting standards for execution of documents in foreclosure cases,
- Curbing improper fee charging, and
- Maintaining a single point of contact.
CNN Money posted a good summary of what is expected of the settlement.
This was promising news for those who have fallen victim to a seemingly hopeless housing crisis. And the Settlement may still have a positive effect in the future, as the Settlement is set to be implemented over the next three years. Ideally, servicers should be identifying homeowners who are eligible for refinancing, principal reductions, and cash payments. The idea was that banks were supposed to offer meaningful relief to those who have been taken advantage of or most in need of keeping their home
However, initial observations indicate the Settlement is not off to a promising start. A common theme appears to be forming where banks are forgiving the second mortgages of homeowners who are in the middle of foreclosure proceedings. This is certainly exciting for the homeowners who are relieved of their second mortgage, but the banks appear to “complying” with the Settlement in a manner that has little effect on the big picture.
Rather, the second-mortgage debts the banks forgive would often go uncollected anyway. The net effect in this situation is that the homeowner is left with having to litigate the foreclosure on the first mortgage, often while attempting to receive a modification. In some cases, the homeowner’s best option may be to file bankruptcy anyway. In which case, the foreclosure is stopped and the homeowner has the opportunity to become current on the first mortgage. Also, the homeowner is often able to have the second mortgage “stripped” –meaning discharged in bankruptcy. The Office of Mortgage Settlement posted a detailed progress report on the Settlement.
Why not offer a meaningful principle reduction on the first mortgage!? This would avoid costly litigation, time and patience in seeking a loan modification, and bankruptcy in some cases. The answer is that banks are profit driven entities that will do everything in their best interest–even after a national settlement agreement.
We remain hopeful the Settlement will have promising results in the future. In any event, there is hope–we offer real solutions in defending foreclosures, negotiating loan modifications, and bankruptcy filings–all under one roof.