Landmark settlement on foreclosure, mortgage fraud

State and federal officials on Thursday announced a settlement of more than $25 billion with five of the nation’s banks over their flawed and fraudulent foreclosure practices. It is the largest government-industry settlement in more than a decade.

The deal aims to help troubled borrowers by reducing the amount they owe on their mortgages, lowering their interest rates and paying restitution to homeowners who suffered mortgage-related abuses. It will force lenders to revamp how they interact with troubled homeowners and bar them from trying to foreclose on borrowers while simultaneously negotiating mortgage modifications.

In addition, firms will have to make sure borrowers have a single point of contact with a lender, rather than being shuttled to different employees with each interaction.

U.S. Attorney General Eric Holder announced the deal--which he called the largest joint federal-state civil settlement in history--at a packed morning news conference attended by top federal housing and finance officials and attorneys general from many states.

Holder excoriated lenders for behaviors that he said “pushed borrowers into foreclosure” and “fueled the downward spiral of our economy.” He called the deal the country’s latest step forward in “righting the wrongs that led to our nation’s housing-market collapse and economic crisis.”

Officials said the agreement--details of which can be seen on www.NationalMortgageSettlement.com-- probably would be filed in a federal court within a matter of weeks and would require the consent of a judge. Once it is approved, banks would begin to deposit money into a trust account, and those funds would be distributed to qualified homeowners by the government. In all, 49 states have signed onto the agreement, with Oklahoma the lone remaining holdout, federal officials said.

Under the terms of the deal, banks would have three years to complete principal writedowns, refinancings and other relief. But officials said they structured the deal so that it provides incentives for actions taken within the first 12 months, in an effort to get aid to homeowners sooner rather than later.

The settlement also includes about $17 billion that would go toward foreclosure-prevention measures, such as lowering the loan balance for borrowers who owe more than their homes are worth. Banks would be given varying “credits” for different ways in which they write off existing debts.

Other provisions would provide for lowering interest rates for homeowners who are current on their loans. In addition, as many as 750,000 borrowers who lost their homes to foreclosure since 2008 would be eligible for payouts of about $2,000 each, without surrendering the right to join future lawsuits, state officials said.

The five banks now at the heart of the settlement are Wells Fargo, Bank of America, J.P. Morgan Chase, Ally Financial and Citigroup. The five faced a public uproar in late 2010 when it became clear that the legal paperwork they had filed in numerous foreclosures included flawed and fraudulent documentation. In many cases, because of the way in which loans were hastily packaged and sold to investors, banks had difficulty verifying ownership of the underlying mortgages.

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