The U.S. government announced Thursday a $25 billion settlement with five of the nation's largest banks over charges of systemic and widespread mortgage fraud, in what is being billed as the largest-ever deal on such charges.
The settlement could potentially help more than 1 million struggling homeowners, according to government officials. It is the largest multi-state agreement since the nationwide tobacco settlements in 1998.
Though the deal does offer some money -- up to $2,000 -- for those who lost their homes during the housing bust, its primary thrust is forward-looking, offering partial loan forgiveness or "principal reduction," to struggling homeowners. More details on the agreement can be found at this government website.
"[The deal] benefits struggling homeowners now, not some time in the future when the help they need may be too late," said Bob Ryan, a senior official at the Department of Justice in a call on Thursday morning.
Officials were careful to note that the deal does not end the government's investigation into the housing bust.
Forty-nine states signed on to the deal with Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and Ally Financial. The only remaining holdout is Oklahoma.
"This action, while significant, is only one step of many," said a spokesperson from the Department of Housing and Urban Development, which served as one of the Obama administration's lead negotiators on the deal. "But this action is momentous."
The spokesperson emphasized that the government thoroughly investigated these five banks and will continue to hold those responsible for housing misdeeds accountable.
Under the terms of the deal, those who already lost their home would receive just a small fraction of the money: a one-time cash payment of up to $2,000 as compensation. "Their entire lives have been turned upside down and changed," said Philip Robinson, the acting executive director of Civil Justice, a Baltimore-based nonprofit that has worked with thousands of Maryland families fighting for their homes.
The deal does offer further remedies for the foreclosure victims but it is yet unclear how effective those will be.
In the weeks leading up to the deal, critics charged that any settlement would be too lenient on banks because the administration chose to negotiate a settlement without first conducting a full investigation into the nature and magnitude of the banks' alleged fraud.
On Thursday morning the HUD spokesperson told reporters, "Our work is not done and we will continue to hold those responsible accountable."
The Obama administration pushed forcefully for the deal to present it to voters in 2012 as evidence that the president is helping homeowners and getting tough on banks.
Splitting a $25 billion deal between five banks, however, will amount to little more than the cost of doing business and is too small a penalty to deter future fraud, many housing advocates say.
"Compared to what these [banks] literally stole, it's just eyewash," said Margery Golant, a Florida-based attorney who represents homeowners and formerly served as assistant general counsel at subprime mortgage giant Ocwen Financial. "These are such serious crimes and for everybody to get a pass like this, it just encourages them to think that they always will."
Also unclear is how far the agreement can go in helping borrowers who are trying to hold onto their home. In addition to granting principal reduction, the deal offers struggling homeowners relief by changing the terms, or refinancing, loans. Those dollars amount to a pittance when you consider the millions of homeowners in need of help, Golant said. "If you do the math, that's a few hundred million per state. That's not enough to change anything."
Consumer advocates supportive of the deal argue that the principal reduction piece is critical. A handful of lenders have already begun offering such assistance, but mortgage giants Fannie Mae and Freddie Mac have fiercely resisted such a move.
"This settlement could be a starting point for principal reduction," said Ira Rheingold, president of the National Association of Consumer Advocates. "Hopefully it will demonstrate how principal reduction can and should benefit homeowners. If it is done well, maybe it will shame Fannie and Freddie into doing what it should have been doing all along."
Economists are also excited about the potential for principal reductions to boost the housing market. Included in the settlement are new rules designed to reform the policies and practices among the mortgage companies, mainly banks, that manage the loans on a daily basis and assist struggling borrowers.
These new rules could finally shut down any excuses previously put forward by the banks for wrongful foreclosure -- if the rules are adequately enforced, said Jared Bernstein, a senior fellow at the Center for Budget and Policy Priorities.
"The fact that the settlement has the state attorneys general behind it means that we really should see an end to some of these nefarious mortgage servicing practices," he said.
The states' ability to enforce the deal remains one of the great unknowns. Nearly four years ago, 11 states signed an $8.4 billion settlement with Bank of America over predatory lending practices by Countrywide Financial. (Bank of America acquired Countrywide in 2008.) Most housing experts agree that the deal has significantly underperformed in large part because the states didn't have a good mechanism for holding the bank accountable.
This settlement will be different because it has a "very robust enforcement mechanism," said Patrick Madigan, Iowa assistant attorney general and one of the lead negotiators for the Countrywide settlement and the current deal. Banks will pay substantial cash penalties if they do not deliver the full amount of homeowner assistance agreed to under the deal, according to Madigan. North Carolina's Banking Commissioner Joseph Smith will serve as the "independent monitor" to enforce the deal's terms.
"There's no comparison between the enforcement and monitoring of this case and Countrywide," Madigan said. It remains to be seen, however, if these enforcement mechanisms have any teeth.
Settlement supporters have high hopes for the deal, though success has to be measured against very narrow expectations, cautioned Rheingold. "In the absence of sufficient federal action, sufficient regulatory action, sufficient congressional action, what we have left is a bunch of state attorneys general saying, 'Our homeowners are getting hurt. We have to do something.'"
"But the state resources are fairly limited, so you have to look at this in terms of what the attorneys general can accomplish within their own set of powers," Rheingold added. "Does it provide the justice necessary? Clearly not. But will it provide an opportunity for homeowners to be treated fairly? I think it will."
This story has been updated to reflect more details of the settlement terms.