The massive settlement among states, the federal government and five of the biggest banks landed on Monday, at last, in a Washington, D.C., federal district court to the relief of homeowners and housing activists who have waited with growing impatience to read the fine details of a deal so far sketched mostly in broad outlines.
Those details, it turns out, are copious. The government submitted more than 1,600 pages of documents, including a complaint, five "consent" agreements and dozens of exhibits. Yet it still isn't clear whether Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and Ally Financial will actually spend $25 billion to meet their obligations under the deal.
The settlement, first announced Feb. 9, came after a 16-month investigation by state and federal officials, including the Department of Justice and the Department of Housing and Urban Development, into widespread reports that banks used forged or "robo-signed" signatures to speed foreclosures, as well as committing other loan abuses in the servicing of home loans.
The settlement provides $20 billion in relief for as many as 1 million struggling homeowners, and also sets out a series of regulations that the banks must follow when servicing home loans, in an attempt to end the abuses that have defined the foreclosure era.
But rather than ending the debate over whether the settlement serves justice and holds banks accountable for their misdeeds, Monday's filing -- which provides little new detail on the scope of the foreclosure and servicing abuses -- likely will just start it anew.
The Justice Department's complaint contains eight counts of misconduct against the banks under state consumer protection laws and federal anti-fraud and bankruptcy acts. The allegations are short on details.
Introducing its case, the Justice Department wrote that the banks' "misconduct resulted in the issuance of improper mortgages, premature and unauthorized foreclosures, violation of service members' and other homeowners' rights and protections, the use of false and deceptive affidavits and other documents, and the waste and abuse of taxpayer funds."
Among the complaint's many factual -- but very general -- allegations are the banks' failure to "timely and accurately apply payments made by borrowers and failing to maintain accurate account statements," "falsely advising borrowers that they must be at least 60 days delinquent in loan payments to qualify for a loan modification," and causing borrowers "to enter into unaffordable mortgage loans that led to increased foreclosures in the States."
Much of the remaining uncertainty stems from how banks can claim credit for different types of homeowner relief.
Under the deal, the banks promised to pay $5 billion in fines to the states and federal government, and to spend at least $3 billion to refinance the mortgages of homeowners who are current on their payments but who are underwater, meaning that they owe more than their home is worth.
Who will ultimately front the money for the remaining $17 billion in obligations depends on whether the banks can encourage investors, such as big state pension funds, to write down the loan values of underwater mortgages -- or whether the banks can engage in these principal reductions without the investors' approval.
Banks will receive $1 in credit for each $1 they spend writing down the value of a loan held on its books. But they will also receive 45 cents in credit for each $1 of write-downs for loans that they service, but that are owned by a private investor. (Many loans were bundled by banks and bought by investors like the California Public Employees' Retirement System).
If banks were simply to write down loans owned by investors, they could potentially meet their obligations while spending much less than $25 billion.
But Ira Rheingold, the executive director of the National Association of Consumer Advocates, said that is unlikely. Rheingold, who said the deal "gives the banks an incentive payment for what they should be doing all along," said it is to the banks' benefit to look to their own loans first, as doing so will improve the quality of loans on their books.
Banks will also receive credit against their obligations for other investor actions that benefit homeowners, such as short sales, in which a home is sold at a loss -- and the investor forgives however much over that sale amount a borrower still owes on the loan.
Whoever pays for the relief, it still won't reach most homeowners. According to an estimate by Ted Gayer of the Brookings Institution, about 500,000 underwater homeowners could qualify for partial loan forgiveness, or "principal reduction." As of January 1, 11.1 million homes were underwater, according to the data analysis company Core Logic.
Loans serviced by the banks but backed by Fannie Mae and Freddie Mac are not eligible for partial loan forgiveness. Under acting director Edward DeMarco, The Federal Housing Finance Agency, which essentially controls the companies, has repeatedly refused to reduce mortgage values, arguing that principal reductions are too costly to taxpayers, who have already poured billions of dollars into the agencies.
Together, Fannie Mae and Freddie Mac own or insure about 60 percent of all outstanding mortgages in the United States.
In a recent interview with The Huffington Post, Shaun Donovan, the Secretary of Housing and Urban Development, said he hopes the deal will "catalyze the national effort" to encourage private investors and Fannie Mae and Freddie Mac to write down loans.
Donovan said the government is actively negotiating with nine other financial institutions that service home loans. Talks with banks in this group, which includes PNC Bank, Suntrust Bank, HSBC and Sovereign Bank, are "fairly far along," he said.
Bank of America, which has the biggest loan portfolio due in large part to the millions of rotten loans it assumed when it acquired Countrywide in 2008, will pay $11.8 billion, by far the biggest share.
As The Huffington Post reported last week, Bank of America has also agreed to offer more than 200,000 underwater homeowners write-downs of their loans to their actual values -- a potentially huge boon to those borrowers, although limitations apply. The other signatory banks have agreed to offer principal reductions to qualifying mortgage holders, which would reduce what they owe to 120 percent of what their home is currently worth.