Mortgage Settlement Announced; Could Exceed $25 Billion

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter and Bank Digest.

The Obama administration, 49 state attorneys general and five of the nation’s largest mortgage servicers have announced a $25 billion agreement to settle mortgage loan servicing and foreclosure abuses, marking the largest joint federal-state settlement ever reached, Attorney General Eric Holder announced.

The five mortgage servicers named in the settlement are: Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc., and Ally Financial Inc. At a Feb. 9, 2012 news conference, Housing and Urban Development Secretary Shaun Donovan said the size of the settlement could exceed $25 billion “as we look to add additional institutions.”

Holder noted that the agreement, which is the result of extensive investigations, not only provides substantial financial relief for homeowners, but also new homeowner protections to guard against any future misconduct. 

While the settlement resolves certain civil claims, it does not prevent state and federal authorities from pursuing criminal enforcement actions, Holder emphasized. He added that the agreement preserves extensive claims related to mortgage securitization activities, including claims that will be the focus of the new Residential Mortgage-backed Securities Working Group. In addition, Holder noted that the agreement does not prevent any claims by individual borrowers who wish to bring their own lawsuits.

Under the terms of the agreement, servicers are required to work off up to $17 billion in principal reduction and other forms of loan modification relief nationwide. Servicers will also have to provide up to $3 billion in refinancing relief. Servicers will also set aside $1.5 billion for borrowers who lost their homes due to foreclosure.

Donovan explained that the actual size of the principal reduction is more likely to be around $35 billion because if a loan is highly delinquent then the banks will not receive a dollar of credit for writing off a dollar of the loan.

Iowa Attorney General Tom Miller, meanwhile, noted that the settlement will produce a Bill of Rights for homeowners, replacing the dysfunctional system of the past. He urged the banking industry to “change things for the benefit of your homeowners, investors, and yourself and your reputation.”

Asked whether the banks involved in the settlement had sufficient reserves to cover the agreement, Donovan replied that “reserves have been taken, I believe, at all of the institutions that are part of this and even some institutions that we’re discussing these claims with but are not part of the announcement today.”

In related action, the Office of the Comptroller of the Currency announced that it has reached agreements in principle with Bank of America, Citibank, JPMorgan Chase and Wells Fargo that they will not contest the OCC’s ability to impose penalties aggregating $394 million, and the OCC agrees to hold in abeyance imposition of such penalties provided the servicers make payments and take other actions under the federal-state settlement with a value equal to at least the penalty amounts that each servicer acknowledges that the OCC could impose. The actions announced today mark important progress in addressing the problems associated with foreclosure processing and are a critical step toward restoring a functioning industry that protects the rights of the customers it serves,” said acting Comptroller of the Currency John Walsh. “The OCC has worked closely with the Department of Justice and other federal agencies throughout the federal-state foreclosure settlement negotiations. We have worked to coordinate the comprehensive fixes to mortgage servicing and foreclosure practices that we required in our April 2011 cease and desist orders to ensure that work complements actions required by the federal-state settlement.”

Also, the Federal Reserve Board announced that it has reached an agreement in principle with Bank of America Corp., Citigroup Inc., Ally Financial, Inc., JPMorgan Chase & Co., and Wells Fargo & Co. totaling $766.5 million for unsafe and unsound processes and practices in residential mortgage loans servicing and foreclosure processing. The settlement figure also includes penalties assessed against the two mortgage servicers owned by JPMorgan Chase and Ally Financial that are subject to the Fed’s jurisdiction for the servicers' failures.

Finally, Bank of America’s mortgage servicing subsidiary, BAC Home Loans Servicing, LP, agreed to settle Federal Trade Commission charges that it illegally assessed more than $36 million worth of fees against struggling homeowners, in violation of an earlier settlement with the FTC.

Serena Lynn, Editor, the CCH Federal Banking Law Reporter and Bank Digest and John M. Pachkowski, J.D., Editor, CCH Federal Banking Law Reporter and Bank Digest; Author, Anti-Money Laundering and Bank Secrecy: Compliance and the USA PATRIOT Act; co-Author CCH Financial Privacy Law Guide and Dodd-Frank Wall Street Reform and Consumer Protection Act—Law, Explanation and Analysis contributed to this report.