The government is expected to announce on Thursday a roughly $26 billion deal with some of the nation's largest banks to settle charges of systemic and widespread mortgage fraud, according to multiple sources close to the negotiations.
The deal would be the largest payout to date from banks in the wake of the financial crisis.
The settlement, 16 months in the making, could bring significant relief to those in danger of losing their homes and also much needed stability to the long-suffering housing market.
Those who already lost their home, however, would receive just the smallest fraction of the money: a one-time cash payment of about $1,800 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. "Does $1,800 sound fair? Does that seem like compensation for a financial and emotional tragedy?"
The Department of Housing and Urban Development, one of the Obama administration's lead negotiators on the deal, could not be reached for comment.
Late Wednesday night, as the terms were being finalized, more than 40 states had signed on, including New York, which had been vocal in its opposition to any deal that was soft on the banks. A source close to the negotiations said that California also was on board, but a representative from Attorney General Kamala Harris's office would not confirm its participation.
The deal between federal officials, the state attorneys general and Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and Ally Financial is an attempt to close the book on a scandal that erupted in 2010, freezing the housing market as the legality of thousands of bank-initiated foreclosures were called into question. The announcement is expected to crank up the pace of bank foreclosures, which has slowed as government officials investigate whether some institutions have forfeited their right to repossess homes after forging key real estate documents.
As part of the deal, participating states would agree not to pursue a variety of independent lawsuits against the banks.
Some consumer advocates argue that the deal is inherently 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.
"Any partial settlement is fraught partly because we don't know the scope of the damages," said Robert Borosage, founder and president of the Institute for America's Future, a left-leaning nonprofit organization. "If the banks get broad immunity, homeowners get screwed because the next investigation won’t be able to get around that."
Under the terms of the settlement, the banks would pay $25 billion to participating states. California is reportedly receiving a total of $6 billion to $15 billion in the settlement.
Potentially more significant, the banks would agree to forgive some mortgage debt owed by struggling borrowers through what's called "principal reduction." The remedy is nearly universally hailed by economists on the right and left as a way to revive the ailing housing market and rescue the nation's struggling underwater borrowers: More than 20 percent of mortgage holders in the United States owe more on their loan than their home is worth.
Citigroup, Wells Fargo and Ally Bank declined to comment while requests for comment from JPMorgan Chase went unanswered. Bank of America declined to discuss the terms of the deal, instead saying, "We're interested in finding a path forward with a comprehensive settlement that benefits homeowners and communities."
The settlement has the potential to prevent future wrongdoing through new bank guidelines that have been crafted as part of the deal. The effectiveness of these new rules will rely heavily on whether the states can enforce them.
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 would offer 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 while the settlement dollars are small, 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. “If $15 to $20 billion is devoted to principal reduction modifications over the next year, that would significantly reduce the number of properties that ultimately end up hitting the market in a distressed sale, thus supporting housing prices,” said Mark Zandi, chief economist at Moody’s Analytics.
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."
UPDATE: The size of the proposed settlement is now a minimum of $26 billion.