OLYMPIA, Wash. -- After a year of negotiations, states, federal regulators and five of the biggest lenders have reached a $25 billion dollar settlement to change foreclosure practices. The goal of the settlement is to impose new restrictions on banks, and to fund loan modifications for homeowners. Backers hope the agreement will also help stabilize the housing market. KUOW’s Amy Radil reports.
Washington state expects to receive $648 million in what Attorney General Rob McKenna calls the “largest consumer financial settlement” in U.S. history.
Housing lawyers and counselors cheered the news of the settlement in Seattle, as McKenna outlined how the money will be used. He says the bulk of the money is intended for loan modifications to help delinquent borrowers.
“Sixty percent of that must be dedicated to principal reductions," McKenna says. "That’s unprecedented.”
Another $84 million in Washington will go to refinance homes worth less than the borrower currently owes. “This part of the settlement responds to the concerns of homeowners who did everything right," McKenna says. "They borrowed what they could afford and they paid their mortgages on time. But because real estate values collapsed they’re underwater and they haven’t been able to refinance at today’s low rates. Many of these borrowers will be able to refinance at current market rates instead.”
People who already lost their homes in foreclosure may receive up to $2,000.
McKenna emphasized that the settlement only applies to borrowers whose loans are owned by Ally, Bank of America, Citigroup, J.P. Morgan Chase and Wells Fargo. That includes just 20 percent of the U.S. mortgage market. It doesn’t apply to loans held by Fannie Mae and Freddy Mac.
Housing lawyers say they’ve seen the banks flout similar agreements in the past. But Lili Sotelo with the Northwest Justice Project says this settlement seems to include more teeth for enforcement.
Another key, she says, is that homeowners can receive this money without waiving their rights to other lawsuits. “We have many cases in litigation and people have claims that are outside of this settlement agreement and they should be able to pursue those claims," Sotelo says. "So that was surprising, very pleasantly.”
The main relief for the banks is that these state and federal agencies are waiving their rights to sue over improper foreclosure practices.
Foreclosures slowed in 2011, but analysts called it an artificial slowdown as banks waited to see how the government would intervene. Sotelo says now that the settlement is final, banks may renew their efforts to deal with delinquent loans. But she says fewer people may lose their homes, because the settlement forces banks to look at other options first.
“I think the activity will be really high," Sotelo says. "I think the actual foreclosures may actually continue to stay low.”
The Attorney General’s office says banks are responsible for contacting eligible homeowners, but cautions that scammers could do so as well. Homeowners can get contact numbers and more information at the website NationalForeclosureSettlement.com.
Copyright 2012 KUOW.