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$25B Proposed Mortgage Settlement Breakdown

The lengthy negotiations between state attorneys general and five of the nation’s largest services have produced a proposed multibillion-dollar settlement over alleged foreclosure and mortgage loan-servicing abuses. The deal could be finalized by early February but many are still asking how this settlement would benefit them.

While terms could change, an early draft of the settlement shows little hope for those who lost their home to foreclosure. USA Today has details from both sides of the negotiations and breaks down what it’s likely to mean for borrowers and the housing market.

From USA Today:

Q: How might $25 billion be spent?
A: Terms could change, but the pot is likely to include:

  • $17 billion for loan modifications. About 60% would go to reduce what people owe on their home loans. Other funds would be used to assist short sales, in which lenders agree to let borrowers sell homes for less than they owe, and to give unemployed borrowers a reprieve from making mortgage payments.
  • $3 billion to help homeowners refinance at about a 5.25% rate.
  • $5 billion in cash. About $1.35 billion would be distributed by states to eligible borrowers who were victims of loan-servicing abuses by one of the five servicers and lost their homes in foreclosure in 2008 through 2011. The rest would fund state and federal housing initiatives.

Q: If I take this payment, could I still sue if I felt I was wronged?
A: Yes, either as an individual or as part of a class action. It’s also possible you could get restitution from a national review of foreclosures underway among 14 large servicers, including these five. That review is being overseen by federal banking regulators.

Q: Who will get principal reductions?
A: Borrowers would have to be at least 60 days late on their mortgages as of a date that’s yet to be determined. They would also have to be underwater, meaning they owe more on their home than it’s worth. And their state and servicer would have to be participants in the settlement.

Q: Who won’t have any chance of a principal reduction?
A: That would be most borrowers, including anyone current on a mortgage and people with loans owned or guaranteed by a government entity, including Freddie Mac, Fannie Mae or the Federal Housing Administration. They hold about 56% of existing home loans, says magazine Inside Mortgage Finance.

Q: How much principal reduction are we talking about, and to how many borrowers?
A: Housing and Urban Development Secretary Shaun Donovan said in a recent speech that it could be 1 million borrowers. Numerous news accounts have said principal reductions would average $20,000.

But 1 million could be a high number, and $20,000 is likely to be low. The average underwater homeowner owes about $50,000 more than their home is worth, says economist Mark Zandi of Moody’s Analytics.

Q: Will I be able to apply for principal reduction or other help?
A: There won’t be a standard application process. But you’ll be able to request it from your servicer if you’re eligible to do so.

Q: What will servicers have to do differently?
A: Servicers will be more restricted in their ability to carry out a foreclosure while someone is pursuing a loan modification. They will also be expected to adhere to more consistent time frames, for instance, as to how long they have to inform borrowers of decisions regarding loan modifications.

Q: Why haven’t all states agreed to this?
A: Some attorneys general have complained that the banks won’t be contributing enough to compensate for the harm done.

Others don’t want the settlement to protect banks from future litigation, including how risky loans were packaged and sold to investors. Attorneys general in California, Massachusetts, New York, Nevada and Delaware have all expressed concern about the settlement talks.

Q: How tough are the potential settlement terms on the banks?
A: Not very, says Paul Miller, banking analyst at FBR Capital Markets. The banks will largely be modifying loans they own themselves and some they service for investor owners. By modifying loans, the banks may reduce their future default rates.

“The loan modifications would be something the banks probably would’ve done on their own anyway,” Miller says.

Rheingold says any settlement will seem inadequate against the trillions in lost equity that resulted from the unprecedented collapse in home prices. He says that the state attorneys general — who started this process — were “filling a void left by the Obama administration’s failure to adequately address the crisis.”

Check out USA Today for the full article and additional thoughts on how the settlement may impact you.

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