Big Banks, 49 States Reach $25 Billion Deal Over Foreclosure Abuses

Even as foreclosed homes — casualties of the housing bubble — still litter the American landscape, federal and state officials announced Thursday a $25 billion deal between 49 states and five mortgage giants designed to give relief to homeowners and hold banks accountable for abusive practices.

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    After long months of negotiating, 49 states joined an agreement today over foreclosure abuses.

    U.S. Attorney General Eric Holder announced the deal in Washington.


    It is the largest joint federal-state civil settlement in the history of this nation.


    The news came even as foreclosed homes still litter the landscape, casualties of the housing bubble that burst in 2008. Many people could not make their payments and were forced out.

    Many others have struggled to keep up, even as the value of their homes fell far below what they owe. But Attorney General Holder said the $25 billion deal is designed to give relief to homeowners and to hold banks accountable for abusive practices.


    We saw that, far too often, servicers pushed borrowers into foreclosure, even though federal regulations require the servicers to try other alternatives first. These failures didn't just hurt borrowers who might have been able to afford modified mortgages. They fueled the downward spiral of our economy and of communities nationwide.


    Bank of America, J.P. Morgan Chase, Wells Fargo, Citigroup and Ally Financial are the five major mortgage lenders who've agreed to reduce loan amounts for nearly one million households.

    And they'll send $2,000 checks to 750,000 Americans who were improperly foreclosed on. Under the deal, the lenders are protected from many civil lawsuits tied to the foreclosure process. But states can still pursue criminal cases, including those tied to original lending practices.

    The settlement was hashed out over the last year-and-a-half between the banks and state attorneys general.

    TOM MILLER, Iowa attorney general: This agreement has more things to help homeowners than anything that we have seen before and probably ever will see again.

    JOHN SUTHERS, Colorado attorney general: The attorney generals realize this settlement is very, very much in the interest of their state and the citizens of their states.


    Between 2007 and early 2012, roughly four million American families lost their homes to foreclosure. And some housing activists say today's deal only scratches the surface.

    Gordon Whitman is with PICO National Network, a faith-based group.

  • GORDON WHITMAN, PICO National Network:

    So, it's a start, but it's a drop in the bucket compared to what we need to get to. And we believe that we will over the next two to three years, one to two years, get to the point where we have that level of $300 billion in principal reduction.


    President Obama acknowledged today the deal is just one step toward fixing the housing industry.


    No action, no matter how meaningful, is going to, by itself, entirely heal the housing market. But this settlement is a start.

    And we're going to make sure that the banks live up to their end of bargain. If they don't, we've set up an independent inspector, a monitor that has the power to make sure they pay exactly what they agreed to pay, plus a penalty if they fail to act.


    Oklahoma was the only state not to sign onto the deal. It reached a separate agreement with the banks.


    We're joined now by two state attorneys general who became key players in this deal. Eric Schneiderman of New York is a Democrat, and Tom Horne of Arizona a Republican.

    Eric Schneiderman, I will start with you.

    We have seen a number of attempts to respond to the housing market crisis. How important do you think this one is?

    ERIC SCHNEIDERMAN, New York attorney general: Oh, I think this is certainly the most significant step so far.

    But as the president said today, and as you just replayed, this is just a step towards the kind of accountability for the folks who blew up the economy, the kind of meaningful relief for homeowners and investors that's required, and putting in place of a set of rules so this never happens again.

    We're on a path to restore the housing market, to write down principal for homeowners and to ensure that there's one set of rules for everyone — important step, but a step on a longer path.


    Well, Tom Horne, let me — yours has been a very hard-hit state, of course. Specifically, who do you see this helping and how?

    TOM HORNE, Arizona attorney general: Well, the primary beneficiaries will be those who are in their homes and are current, have paid their payments for at least a year, but who face difficulty doing that in the future in the full amount, but they can pay less than the full amount.

    And the largest component of the settlement would give money to reduce principal payments and some also to refinance and reduce interest payments for these people, so they'll be able to stay in their home. So that's very important for them. It's also better for the lenders, because the present value to them of those reduced payments is going to be a lot more than what they would get if they proceeded to foreclose.

    So it's a win for the person who gets to stay in his home or her home. It's a win for the lender, and it's certainly a win for the economy. In the case of Arizona, $1.6 billion will come into our economy to prop up a very important part of our economy, the housing market.


    Eric Schneiderman, just to help people, again, to try to make this very concrete, what does someone have to do or what kind of position do they have to be in to qualify for this help?


    Well, there is a variety, and some of it varies from state to state.

    The first relief we're going to see here in New York, where we have a smaller portion of folks who have underwater mortgages than General Horne does out in Arizona, first relief they're going to see is that we obtain $136 million that's going to go primarily towards legal services, housing counseling and programs to prevent people from being foreclosed on.

    The second level of relief that's going to take longer to implement is that the banks are required to reach out to people with underwater mortgages, whose mortgages are more expensive than the value of the homes right now, which is what General Horne was referring to, and offer them a chance to either refinance or reduce the principal.

    Not everyone is going to get a deal, but there's a requirement that we have put on the banks that they're going to make those solicitations. So people should be aware of that. We've set up contacts in all the regional offices at the New York state attorney general. I know some of my counterparts are doing the same thing.

    We'll be providing the messages to the public. But the first step is to try and prevent foreclosures where they're not warranted. The second step is the program of principal reduction and loan modification that's going to be going into effect.


    Now, Tom Horne, we heard the housing advocate — and you're hearing it all over the place today — refer to this as a — quote — "drop in the bucket."

    I wonder, do you think he is wrong? If you look at $25 billion, quite small, compared to the $700 billion in negative equity out there, people getting $2,000 compared to the value of the homes that they have lost in many cases, is that fellow wrong in saying this is just a drop in the bucket?


    Well, first of all, the $2,000, plus or minus, will go to people who have already been foreclosed on. They don't have to give up anything for that. They still have their rights to bring lawsuits if they were badly treated by the servicers at the time.

    They don't have to give up those rights. All they have to do is say that they were badly treated by the servicer, and they get the $2,000. The other sums, we're talking about $25 billion. You will remember Everett Dirksen once said, a billion here, a billion there, pretty soon, it's real money.

    This is very significant. If we had proceeded with the lawsuits, it would have been about four or five years before we go through the lawsuit and the appeals, and if we had done better, that would have been good, but we could have done worse, and that would have been a terrible thing, to have done worse and lost four or five years, when people were thrown out of their homes, where otherwise they would have been saved with their mortgages. So I think this was a very prudent agreement.

    We in Arizona didn't actually agree until 11:00 last night on an agreement that was announced at 8:00 this morning because we had some special things we had to work out with Bank of America. So we negotiated very hard. But in the end, I think this is a very prudent agreement as a settlement of what otherwise would have been lawsuits that might have brought us more, but might have brought us less.


    Now, Eric Schneiderman, you held out for a long time on this as well. Explain what your concerns were.


    Well, my concern, really, is reflected in the comment that General Horne just made.

    I was concerned about giving up claims. And it's very important to understand that homeowners still do have the right to go into court themselves. And part of the provision of legal services for people is that people — individuals that were wronged still can seek damages. We have not given up their claims.

    And my concern all along was that we not release claims that haven't been investigated and that the settlement be limited to issues like robo-signing, release of claims for misconduct and foreclosure proceedings.

    When I got involved in the negotiations a year ago, the banks were really pushing for a release of the broad misconduct, the securities fraud and tax fraud and other conduct that actually melted down the American economy in 2008.

    We have preserved all of those claims. And President Obama in the State of the Union announced that we are, in fact, going to have a joint state-federal working group to conduct a full investigation of those claims in a more comprehensive, coordinated way than we have ever done. And I'm one of the co-chairs.

    So the important thing in evaluating a settlement is partly to look at how much money you get. And it's true this is a very small portion of the negative equity that's out there. It's a step, but just a step on the path. But, in evaluating it, you have to look at what claims you're giving up. What are you getting for what you're giving up?

    And, in this case, I'm confident we held out for and fought to have the claims preserved that really give us the most leverage to go back to the folks that blew up the American economy and get more meaningful relief for both homeowners and investors that were hurt in that debacle.


    And are you — just to stay with you, are you confident as well that these practices, the very kinds of things you were just talking about and that caused the problem in the first place, are you confident now that those have ended?


    Well, certainly in terms of what's going on in the securities market, those have ended. And there was a response to that with Dodd-Frank. The federal government has passed new rules.

    We now have the Consumer Financial Protection Bureau being set up to deal with some of these problems. I'm confident that, if we continue to push forward with that, we can put into effect prudent regulations, so that the overwhelming majority of folks in the financial services sector who just want to play by the rules and make money for themselves and their clients can prosper.

    But the race to the bottom that took place in 2005, 2006 and 2007, when there were packages of mortgages that just never should have been made and securities that never should have been sold, that kind of thing has to be prevented in the future. We preserved all our claims to go back after the folks who committed any breach of law, whether it's tax fraud, securities fraud, investment fraud or insurance fraud, during that era, and our working group is very aggressively pursuing those claims.


    All right. All right, and let me . . .


    If I could add to . . .


    Yeah, go ahead.


    May I add to that?




    An important part of this settlement, which is dealing with misconduct by people who are servicing the mortgages, the five biggest banks, is a reform of the methods used by the servicers.

    So, you had abuses such as one person from the bank worked out with the homeowner a modification. And so he was making reduced payments. And the homeowner was making the reduced payments, doing everything he was supposed to do, and then someone else from the bank would foreclose, and he'd come home and he'd find, even though he was doing everything he was supposed to do, his house was foreclosed on.

    Those practices are being reformed, so that you have one person that you're dealing with, so that if they deny the modification, you can appeal it, a number of other reforms in the way these things are implemented. And that is going to be monitored. And there are strict penalties for not living up to the new guidelines.

    So, in addition to the $25 billion, which I think is very significant and important for our economy, there are significant reforms in the way the loans are — services, and it does away with a lot of abuses with teeth behind that.


    All right, Attorney Generals Tom Horne of Arizona and Eric Schneiderman of New York, thank you both very much.


    Thanks for having us.


    Thanks, Jeff.