Ten major banks last week agreed to pay out $8.5 billion to settle allegations that they engaged in abusive foreclosure practices in 2009 and 2010.
Of the settlement money, $3.3 billion will go to homeowners whose homes actually went into foreclosure. The remaining $5.2 billion will be used for loan modifications and other relief.
Some 3.8 million homeowners were eligible for the review, meaning that the $3.3 billion in settlement money comes to less than $1,000 per family, although some borrowers could receive as much as $125,000, depending on the degree of bank error.
Mortgage lenders have faced a firestorm of criticism for their foreclosure practices, which included “robo-signing” foreclosures without verifying that they were valid, making improper rate hikes and foreclosing on homes when nobody was actually sure who owned the mortgage.
The settlement replaced an independent foreclosure review process designed to root out faulty foreclosures one-by-one, but which ended up being too costly, time consuming and ridden with errors. A report on the Huffington Posts characterizes the process as “doomed from the start.“
Skeptics wonder if the banks are getting off easy, given the vast scope of their abusive practices. “Although I look forward to obtaining information about how this deal may assist homeowners, I have serious concerns that this settlement may allow banks to skirt what they owe and sweep past abuses under the rug without determining the full harm borrowers have suffered,” said Rep. Elijah Cummings, D-Md., ranking Democrat on the House Oversight and Government Reform Committee.
A government official who spoke to reporters on the condition of anonymity defended the settlement, saying, “The best way to think about that is that it was a negotiated amount. It represents an acceleration of payments to consumers that results in more consumers getting more money in a much quicker time frame.”
How To Cash in
Regardless of whether consumers got the best deal, the settlement is a done deal and people who were foreclosed on in 2009 and 2010 can sit back and wait for their checks, if all goes as planned.
“Borrowers do NOT have to take any further action in order to be eligible for compensation,” says Andy Nguyen, an attorney with Atlantis Law, a California firm that includes foreclosure defense among its practice areas. “A payment agent will be appointed to be in charge of distributing payments to borrowers. Eligible borrowers should be contacted by the payment agent by the end of March, with information about their payment and details about their compensation.”
In the event eligible former homeowners don’t receive a payment, an attorney can help. “Supposedly, if the borrower is eligible for a payment, they will receive it,” Nguyen says. “If they aren’t contacted by the payment agent by April, borrowers should contact their mortgage servicer. They can also retain an attorney to help with the process and to ensure they receive all the benefits they are entitled to. Eligible homeowners who receive payment (and those who don’t) are still free to sue their mortgage servicers over the foreclosure abuses.”
The rest of the $5.2 billion will go mostly toward loan modification and short sale deficiency forgiveness. A short sale takes place when a homeowner sells the house for less than what they owe the bank. “Most of the time, the lender will agree not to keep going after the borrower for the difference between the sale price and the remaining balance,” the attorney explains. “If the [lender] had gone after a borrower and obtained a judgment for a short sale deficiency, it must now be forgiven.”
Consumers may also be eligible for some relief on the terms of their mortgage, but will have to speak with their lenders to find out the exact terms. “Criteria for refinancing will vary from lender to lender, but homeowners who have mortgages serviced by one of the 10 participating servicers should contact them directly to start working on a loan modification or refinancing,” Nguyen says. “Hopefully this settlement will put more pressure on the mortgage servicers to put into place more fair and efficient processes for loan modifications and refinancing.”