More on the Foreclosure Settlement


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More details are emerging on how the $26 billion settlement over mortgage abuses will benefit homeowners. Here's an update.

Mortgage refinancing


As previously reported, $3 billion of the settlement will go toward refinancing underwater mortgages, that is, home loans where borrowers owe more than their homes are worth due to falling property values. But it's not at all clear how these funds might be used. It appears that these funds will be used to offset the cost of reducing mortgage interest rates through refinancing, rather than writing off part of the borrower's debt through a principal reduction.


An executive summary of the terms of the settlement makes no mention of principal reductions in connection with mortgage refinancing, only with loan modifications for delinquent borrowers (see below). That suggests that this portion of the settlement will focus on reducing interest rates for borrowers instead.


The average underwater homeowner has about $260,000 in total mortgage debt, according to recent figures from CoreLogic. Reducing the interest rate on that debt by 1 - 1.5 percentage points save would the average homeowner about $200-$280 a month. That works out to enabling about 300,000-400,000 underwater homeowners to refinance.


To qualify for refinancing under the settlement, borrowers must be underwater on their mortgage, be up-to-date on their mortgage payments, have a current interest rate of at least 5.25 percent and be able to save at least $100 a month through refinancing.


Loan modifications


At least $10 billion of the settlement will be used for principal reductions on underwater mortgages where borrowers are either in default or at risk of defaulting. If the average markdown is $20,000, as predicted, that would help half a million homeowners. However, both that total and the average could turn out higher, because the specifics of the settlement do not necessarily give banks a full dollar of credit for each dollar of relief provided.


Principal reductions will be tied to loan modifications, in which the terms of the current mortgage are adjusted, such as by extending the term or reducing the interest rate, without actually refinancing the loan.


Short sales and forbearance


The settlement executive summary indicates that $5.2 billion will be made available for other types of homeowner assistance, including facilitating short sales that allow the homeowner to surrender an underwater property short of foreclosure.


That portion of the settlement will also be used to defer mortgage payments for homeowners who are temporarily unemployed, and to waive debts owed for payment deficiencies.


Foreclosure compensation


As previously reported, some $1.5 billion will be used to provide payments of $2,000 as compensation to former homeowners who were foreclosed on after Jan.1, 2008.


Servicer reforms


Other parts of the settlement impose reforms on the way banks subject to the agreement pursue foreclosures and manage mortgages in their portfolios. Lenders will be prohibited from foreclosing on a homeowner who is in the process of seeking a loan modification and banks will be required to make available one staff member as the primary point of contact for borrowers seeking loan modifications.


Who's eligible


To qualify for mortgage assistance, you must have a mortgage with one of the five major banks participating in the agreement - Bank of America, Wells Fargo, JP Morgan Chase, Citibank and Ally Financial (formerly GMAC). Homeowners with mortgages backed by Fannie Mae, Freddie Mac or the FHA are not eligible, even though one of the above banks may be servicing their mortgage, as those agencies did not participate in the agreement. Other, smaller banks may yet sign onto the settlement.


Why did this happen?


The settlement resolves federal and state claims against the banks involved over alleged improprieties, particularly a practice known as "robosigning" or rubber-stamping foreclosure affidavits without properly verifying them. Other complaints included foreclosing on borrowers who had been told they were being evaluated for a loan modification, and failing to process borrower's requests for a modified payment schedule.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance , Banking and Loans

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