The $25 billion national settlement with five large banks announced Thursday will bring struggling California homeowners at least $12 billion in relief, but many say the deal isn't a game changer for the housing market or the economy.
Rather, it's thought of as a good step -- the largest yet in terms of relief for homeowners -- that is likely to add to political pressure for further measures.
"There is a lot of work to be done," said California Attorney General Kamala Harris, whose hard bargaining probably increased the size of the settlement. Banks agreed to an additional $3 billion shortly after she dropped out of negotiations last fall.
The agreement, concluding a year of negotiations, penalizes five
California will get at least $12 billion and as much as $18 billion from the deal, according to the California Attorney General's Office, much of that in principal reduction or other financial relief for troubled homeowners. Because of the complex way the deal is structured, the total settlement could grow above $25 billion, and
The settlement will help people whose loans are owned or serviced by the five banks reduce their principal balance; refinance underwater mortgages at lower interest rates; cancel money owed on mortgages when homes were foreclosed, and if they were foreclosed between 2008 and the end of 2011, obtain small cash payments.
But experts say that solving the housing crisis would require more aggressive steps. For example, states must go after fraudulent lending practices in court, as California and several other states have done, and pass legislation to protect homeowners from predatory lending practices.
Many say the biggest boost would come if government-sponsored Fannie Mae and Freddie Mac, which control almost two- thirds of the home loans made in California during the period covered by the agreement, were to agree to principal forgiveness.
The Federal Housing Finance Agency, which would have to agree to that policy change, has refused.
FHFA's acting director, Edward DeMarco, says his hands are tied by statutes that prevent FHFA from agreeing to principal forgiveness by the two companies. But a number of elected officials and community groups don't see it that way and have called for his removal.
On Thursday, Harris said bluntly that DeMarco "should step aside, because the guy clearly cannot figure out what his job requires."
The $25 billion deal agreed to by 49 states -- Oklahoma is the one holdout -- requires lenders to dedicate $20 billion for financial relief to homeowners. At least $10 billion will be for reducing the principal on underwater borrowers, which will make it easier for these people to pay off their current loan or refinance into a better one. An additional $3 billion is set aside for refinancing; and up to $7 billion for other forms of relief, including principal forbearance, anti-blight programs, money to help with short sales and relocation assistance. Because servicers will receive only partial credit for every dollar spent on some of the required activities, the settlement will provide direct benefits to borrowers in excess of the $20 billion of financial relief.
Another $5 billion in cash will go to the federal and state governments, $1.5 billion of which will be for compensation to foreclosure victims who lost their homes between Jan. 1, 2008, and Dec. 31, 2011.
Banks will be restricted from foreclosing while homeowners are being considered for loan modifications, and homeowners will have the right to appeal denials of those modifications. A single point of contact will be created for borrowers inquiring about their loans.
California's agreement, which includes special provisions for the state, received generally good marks from California community groups that had pressured Harris not to give in to an earlier deal that they perceived as letting banks off the hook.
California will be able to pursue banks for concealing problems with loans they sold to investors and will be able to criminally prosecute them for fraud. It also will be able to prosecute civil rights violations if discriminatory practices are uncovered in lending to minority communities. Individual homeowners will still be able to sue banks. Money for principal reductions will target the state's hardest hit counties.
"The attorney general deserves huge credit for vastly improving the deal for California," said Rick Jacobs of Californians for a Fair Settlement. "This went from what we heard was a couple billion dollars for California to as much as $18 billion." But, he said, "it's just a start."
This deal won't right either the economy or the housing market, said Patrick Newport, an economist with IHS Global Insight. He said the deal is a chip out of the $700 billion to $750 billion in negative equity nationwide. "The housing market is getting better, and this will help it a little bit this year, but we're still going to be in a mess for the next couple of years."
Kevin Stein, of the California Reinvestment Coalition, said of the deal, "There are some good things about it, and there are some bad things about it, but our main point is that the whole deal in its entirety is only one small step in what needs to happen to deal with the crisis."
250,000 California homeowners who are underwater or behind on their mortgage payments.
Additional details on the settlement, including how homeowners can apply for relief, can be found at www.oag.ca.gov and www.nationalmortgagesettlement.com.
Source: California attorney general