Homeowners with underwater mortgages can breathe a little easier following the $25 billion agreement announced Thursday by state and federal officials over fraudulent mortgage foreclosure practices by the country’s biggest mortgage lenders.
The deal will provide $1 billion in relief to former and current homeowners in Illinois and lay down significant protections for homeowners in the future, said Illinois Attorney General Lisa Madigan.
The banks named in the agreement — Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc., and Ally Financial Inc. — collectively service some 60 percent of all U.S. mortgages. They had been under investigation for rampant foreclosure fraud, such as robo-signing, that has been blamed for continued chaos in the depressed housing market.
Under the agreement, borrowers whose homes were sold or foreclosed on between the beginning of 2008 and the end of 2011 are likely to receive a check for roughly $2,000. Banks that help people stay in their homes by offering more affordable terms will receive “credits” through the agreement.
What won’t be addressed are the thousands of vacant properties that continue to sit on the market today. Borrowers who already lost their home to foreclosure should not expect this deal to help move them back in.
Nevertheless, officials say the deal is a step in the right direction to stabilize the U.S. housing market.
In Illinois, there are roughly 400,000 homeowners with underwater mortgages, and another 80,000 whose homes are nearly underwater, according to the Woodstock Institute, a Chicago-based nonprofit organization that advocates fair lending, wealth creation and financial systems reform.
The average underwater homeowner owes $61,000 more than the value of the home, according to Tom Feltner, vice president of the Woodstock Institute.
Feltner says the biggest benefit to come out of Thursday’s deal is the agreement to provide banks with credits to reduce principal payments on mortgages.
The agreement has created new standards and new expectations for wide scale principal reductions, says Feltner, who adds that this specific portion of the deal is setting an important precedent for the future of the housing market.
Feltner adds that the agreement will provide significant new resources to states and policy makers, assuring they can hold banks accountable for the loans they issue to homebuyers. The agreement will put into place strong oversight mechanisms and enforce penalties for failure to process foreclosures properly.
The deal comes at a time when the health of the housing market is a key focal point in the country’s economic recovery. In his State of the Union address last month, President Obama announced he was putting forward a “Homeowner’s Bill of Rights” which outlines a single set of standards so that borrowers and lenders “play by the same rules.”