March 1, 2012 by: Matthew Malamud
The $25 billion settlement recently reached between 49 state attorneys general and five mortgage servicers that is intended to help current and former homeowners caught up in the foreclosure crisis may be most notable for what it doesn’t do—release banks and their third-party servicers from private actions.
An executive summary of the settlement indicates that the state attorneys general and banking regulators will no longer pursue civil claims against Ally Financial (formerly GMAC), Bank of America, Citibank, JPMorgan Chase & Co., and Wells Fargo over past conduct related to mortgage loan servicing, foreclosure preparation, and mortgage loan origination services.
The banks will pay a total of $5 billion in penalties and provide eligible current and former homeowners with $20 billion in various forms of relief, such as principal reduction and refinancing. The banks will also adopt new servicing standards, which include ending the mass signing of unverified foreclosure documents, a practice known as “robosigning.”
The settlement also provides compensation to servicemembers who were foreclosed on after January 1, 2006, in violation of the Servicemembers Civil Relief Act, and establishes new protections for servicemembers.
However, the settlement does not affect liability of the banks to homeowners or investors, nor does it clear the banks of any criminal wrongdoing. The executive summary states: “Securitization claims, including claims of state and local pension funds, and including investor claims related to the formation, marketing, or offering of securities, are fully preserved. Other claims that are not released include violations of state fair lending laws, criminal law enforcement, claims of state agencies having independent regulatory jurisdiction, claims of county recorders for fees, and actions to quiet title to foreclosed properties. Of course, the release does not affect the rights of any individuals or entities to pursue their own claims for relief.”
The government is touting the settlement’s size, but those who represent homeowners say $25 billion is just a drop in the bucket. About 750,000 Americans who have lost their homes—a fraction of the total—will receive $2,000 in compensation under the settlement, while as many as 1 million homeowners who currently owe more on their mortgages than their homes are worth could be eligible for as much as $20,000 in principal reductions.
“We’re $700 billion under water,” said Diane Thompson, of counsel for the National Consumer Law Center in Boston. “The money for principal reductions is clearly not going to be enough to solve the problem, but it is a good start.”
Thompson was glad to see that those who lost their homes and opt in to the settlement can still proceed with individual or class action litigation against the servicers. “I suspect that it took a fair amount of work on the part of the attorneys general to get the banks to agree to that and I think it’s extremely important that they did,” she said.
The new servicing standards will add strength and credibility to homeowners’ allegations that banks were not following best practices, Thompson said. “But this settlement involves just five mortgage servicers. Homeowners with mortgages owned by Fannie Mae and Freddie Mac—about half of all mortgages—are not covered. It’s an important step forward, but there’s a lot more work that needs to be done,” she said.