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Holding Banks Accountable

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Too often, real progress in Washington can be stymied by bureaucratic red tape, turf fights, or conflicts between federal and state authorities. Unfortunately, it has become a place where partisan deadlock and political games can threaten to crowd out substantive debate.

In times of crisis -- when people's livelihoods are in jeopardy and families are losing their homes to foreclosure -- they deserve better than intransigent bureaucracy. They need and deserve a government that actually solves problems.

This week, the Obama Administration and a bipartisan coalition of 49 state attorneys general demonstrated what can be accomplished when people put aside turf wars and focus on what they can do to make things better. By working closely with one another across federal agencies, state boundaries, and party lines, we reached a historic mortgage servicing settlement on behalf of American homeowners.

This $25 billion joint federal-state civil settlement -- the largest ever obtained -- addresses foreclosure processing violations by the nation's five largest mortgage servicers. It will provide immediate relief to 1.75 million homeowners, in part by forcing banks to reduce the principal balance on many loans, refinancing loans for "underwater" borrowers, and paying billions of dollars to states and consumers.

The need for a settlement on this scale has long been clear. Some five years after the housing bubble burst, America continues to pay a steep price. Lenders sold loans to people who couldn't afford them and packaged mortgages to make profits that turned out to be nothing more than a mirage. Their actions hurt millions of families who did the right thing, but still lost their houses or saw their home prices drop. And, unfortunately, as our extensive investigations found, abuses continued long after consumers bought their homes.

In response to thousands of mortgage servicing complaints fielded by the U.S. Department of Housing and Urban Development (HUD), state attorneys general, and banking regulators across the country, HUD initiated a large-scale review of the Federal Housing Administration's (FHA) ten largest servicers in the summer of 2010. Devoting some 6,000 hours to reviewing servicing files for thousands of FHA-insured loans, the scope of this review soon broadened to encompass a long list of mortgage servicing issues, including lost paperwork, long delays, and missed deadlines for loan modifications.

The Justice Department's U.S. Trustees Program reviewed more than 37,000 bankruptcy claims and motions filed by the top five servicers. And HUD's Office of the Inspector General, the Justice Department, and state authorities discovered that the country's five largest loan servicers routinely signed foreclosure-related documents without knowing whether the facts they contained were correct.

Some have asked why we don't address these actions by taking the banks to court. But rather than pursuing hundreds of lawsuits with varying degrees of success, the goal of this settlement has been to benefit struggling homeowners and to do so now -- not sometime in the future, when it may be too late to help many families.

That's why first and foremost, this agreement puts billions into the hands of consumers - helping roughly a million families who owe more on their mortgage than their home is worth by reducing the overall balance of their loan. Principal reduction on this scale will not only help underwater homeowners start to build equity again -- it will aid their neighbors, many of whom watched their own property values plummet by $5,000-10,000 simply because they lived on the same block as a foreclosed home.

In addition, these funds will help unemployed homeowners start to catch up on late mortgage payments by reducing their monthly payments for a period of time. They will support housing counseling services, to connect at-risk families to the help they need, and to assist communities struggling with vacant and abandoned properties that drag down neighborhood home values. And, by instituting tough penalties enforced by an independent monitor, the settlement will ensure that banks have a strong incentive to provide this help both quickly and effectively.

The settlement also provides cash payments to homeowners who were victims of deceptive servicing practices. Of course, we recognize that the pain of this crisis cannot be undone by writing a check. But there's no question that these payments, which will be provided through the offices of State Attorneys General, can provide welcome relief.

This settlement also forces banks to clean up their acts -- and to fix the problems uncovered during our investigations -- by committing them to major reforms in terms of how they service mortgage loans. This is significant, given that these banks service nearly 2 out of every 3 mortgages. And these new customer service standards are in keeping with the Homeowners Bill of Rights recently announced by President Obama -- a single, straightforward set of commonsense rules that families can count on, requiring lenders and servicers to honor a long list of rights for those facing foreclosure.

In some ways, just as important as what this settlement accomplishes is what it does not do.
It will not prevent state attorneys general or regulators from pursuing criminal cases or conducting investigations that get to the bottom of the crisis. Indeed, last month, we joined New York Attorney General Schneiderman and several other state attorneys general in announcing a working group focused on investigating the conduct of financial servicers that broke the law and contributed to the crash of the housing market, including securities- and origination-related cases.

While this historic settlement isn't designed to address all the issues of the housing crisis, it will offer significant help to those who suffered the most harm. Alongside the broad-based refinancing plan President Obama announced to help homeowners, it provides a path toward stability for our housing market and our broader economy. And, by ensuring that banks and mortgage servicers fulfill their essential obligations -- and taking major steps to hold these institutions accountable -- it proves that we can make real progress, and achieve extraordinary results, when we work together.

This piece originally ran in the Las Vegas Sun.