States, banks reach foreclosure-abuse settlement

Attor­ney Gen­eral Eric Holder, cen­ter, accom­pa­nied by Hous­ing and Urban Devel­op­ment (HUD) Sec­re­tary Shaun Dono­van, right, Iowa Attor­ney Gen­eral Tom Miller, and other fed­eral and state offi­cials announces a set­tle­ment regard­ing mort­gage loan ser­vic­ing and fore­clo­sure abuse, Thurs­day at the Jus­tice Depart­ment in Wash­ing­ton. (Asso­ci­ated Press | Cliff Owen)

DEREK KRAVITZ

AP Real Estate Writer

WASHINGTON — U.S. states have reached a $25 bil­lion deal with the nation’s biggest mort­gage lenders over fore­clo­sure abuses that occurred after the hous­ing bub­ble burst.

Fed­eral and state offi­cials announced the deal Thurs­day. It is the biggest set­tle­ment involv­ing a sin­gle indus­try since a 1998 mul­ti­state tobacco deal.

Under the agree­ment, five major banks — Bank of Amer­ica, JPMor­gan Chase, Wells Fargo, Cit­i­group and Ally Finan­cial — will reduce loans for nearly 1 mil­lion house­holds. They will also send checks of $2,000 to about 750,000 Amer­i­cans who were improp­erly fore­closed upon. The banks will have three years to ful­fill the terms of the deal.

All but one of the 50 states agreed to the deal. Okla­homa, the lone hold­out, will receive no money.

The con­di­tions will be over­seen by Joseph A. Smith Jr., North Carolina’s bank­ing com­mis­sioner. Lenders that vio­late the deal could face $1 mil­lion penal­ties per vio­la­tion and up to $5 mil­lion for repeat violators.

The set­tle­ment ends a painful chap­ter that emerged from the finan­cial cri­sis, when home val­ues sank and mil­lions edged toward fore­clo­sure. Many com­pa­nies processed fore­clo­sures with­out ver­i­fy­ing doc­u­ments. Some employ­ees signed papers they hadn’t read or used fake sig­na­tures to speed fore­clo­sures — an action known as robo-signing.

Under the deal, 49 states said they won’t pur­sue civil charges related to these types of abuses. Home­own­ers can still sue lenders in civil court on their own, and fed­eral and state author­i­ties can pur­sue crim­i­nal charges.

“There were many small wrongs that were done here,” said U.S. Hous­ing and Urban Devel­op­ment Sec­re­tary Shaun Dono­van. “This does not resolve every­thing. We will be aggres­sive about going after claims elsewhere.”

Bank of Amer­ica will pay the most to bor­row­ers as part of the deal — nearly $8.6 bil­lion. Wells Fargo will pay about $4.3 bil­lion, JPMor­gan Chase will pay roughly $4.2 bil­lion, Cit­i­group will pay about $1.8 bil­lion and Ally Finan­cial will pay $200 mil­lion. This does not include $5.5 bil­lion in fed­eral and state payments.

The deal also ends a sep­a­rate inves­ti­ga­tion into Bank of Amer­ica and Coun­try­wide for inflat­ing appraisals of loans from 2003 through most of 2009. Bank of Amer­ica acquired Coun­try­wide in 2008.

“The set­tle­ment includes far reach­ing relief that will help many of our cus­tomers and com­ple­ment our already exten­sive efforts to improve our bor­rower assis­tance efforts and ser­vic­ing processes,” JPMor­gan Chase said in a statement.

The banks and U.S. state attor­neys gen­eral agreed to the deal late Wednes­day after 16 months of con­tentious negotiations.

New York and Cal­i­for­nia came on board late Wednes­day. Cal­i­for­nia has more than 2 mil­lion “under­wa­ter” bor­row­ers, whose homes are worth less than their mort­gages. New York has some 118,000 home­own­ers who are underwater.

In addi­tion to the pay­ments and mort­gage reduc­tions, the deal promises to reshape long-standing mort­gage lend­ing guide­lines. It will make it eas­ier for those at risk of fore­clo­sure to make their pay­ments and keep their homes.

Those who lost their homes to fore­clo­sure are unlikely to get their homes back or ben­e­fit much finan­cially from the settlement.

The set­tle­ment would apply only to pri­vately held mort­gages issued from 2008 through 2011. Banks own about half of all U.S. mort­gages — roughly 30 mil­lion loans. Those owned by mort­gage giants Fan­nie Mae and Fred­die Mac are not cov­ered by the deal.

Some crit­ics say the pro­posed deal doesn’t go far enough. They have argued for a thor­ough inves­ti­ga­tion of poten­tially ille­gal fore­clo­sure prac­tices before a set­tle­ment is ham­mered out.

Under the deal:

— Roughly $1.5 bil­lion for direct pay­outs, in the form of $2,000 checks, for about 750,000 Amer­i­cans who were unfairly or improp­erly fore­closed upon; another $3.5 bil­lion will go directly to states.

— At least $10 bil­lion for reduc­ing mort­gage amounts.

— Up to $7 bil­lion for other state home­owner programs.

— At least $3 bil­lion for refi­nanc­ing loans for home­own­ers who are cur­rent on their mort­gage pay­ments but who are underwater.

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