Where the money will go

Where the money will go (February 9, 2012)

In the largest deal to date aimed at addressing the housing meltdown, federal and state officials on Thursday announced a $26 billion foreclosure settlement with five of the largest home lenders.

The deal settles potential state charges about allegations of improper foreclosures based on robosigning, seizures made without proper paperwork.

Attorney General Rob McKenna released a statement that said thousands of Washington state homeowners could beneift from the settlement. Those who would receive assistance include people who are underwater on their homes, owing more than the property is worth, and people who have lost their homes to foreclosure.

The settlement includes the Justice Department and the U.S. Department of Housing and Urban Development, as well as 49 state attorneys general -- all but Oklahoma.

"We are using this opportunity to fix a broken system," said U.S. Attorney General Eric Holder at the news conference announcing the settlement.

"Our settlement holds America's largest banks accountable for harms homeowners suffered from shoddy loan servicing, illegal robo-signing and faulty foreclosure processing," McKenna said.

The settlement sets up a federal monitor to oversee the process and try to prevent roadblocks and red tape that tripped many homeowners seeking help in earlier programs designed to address the housing crisis.

President Obama said the settlement will "begin to turn the page on an era of wrecklessness that has left so much damage in its wake."

"No action, no matter how meaningful, is going to by itself entirely heal the housing market," he said in separate remarks at the White House. "But this settlement is a start."

Most of the relief will go to those who owe far more than their homes are worth. That relief will come over the course of the next three years, with the banks having incentives to provide most of the relief in the next 12 months.

"This settlement responds to the concerns of homeowners who did everything right -- borrowed what they could afford and paid their mortgages on time -- but because real estate values collapsed, they're underwater [and] have not been able to refinance at today's low rates," McKenna said.

What the settlement means to you

Principal reduction: At least $17 billion -- about $483 million for Washington state -- will go to reducing the principal owed by homeowners who are both underwater and behind on their mortgages.

An estimated $70 million for Washington state is estimated to be spent by servicers to refinance  homes worth less than what is owed. To qualify, borrowers must be current on their mortgage payments on a mortgage owned by Bank of America, JPMorgan Chase, Wells Fargo, Citigroup or Ally (formerly GMAC).

Homeowners who were victims of foreclosure between Jan. 1, 2008 and Dec. 31, 2011 with be notified if they qualify. Estimated payments to each homeowner is $1,500-2,000. Other monies are earmarked for foreclosure relief programs.

As the New York Times reported, "because of a complicated formula being used to distribute the money, federal officials says the ultimate benefits provided to homeowners could equal a larger sum."

The agreement calls for principal reduction for as many as 1 million people. But it's unlikely the money will go that far, because many people need more than the $17,000 average reduction that would result if the money is split among 1 million homeowners.

At the same time, total principal reduction could go higher -- to as much as $34 billion -- since the agreement requires deeper principal reductions for the most troubled loans.

Refinancing: Officials say up to 750,000 other underwater homeowners who are current on their mortgages will be able to refinance their current loans at lower rates. They will not receive a reduction in principal, but with mortgage rates now near record lows, they could receive substantial savings on their monthly payments.

The settlement sets aside $3 billion to account for the reduced interest payments the banks will receive after the refinancing.

Robosigning payments: About $1.5 billion of the settlement will go to homeowners who had their homes foreclosed upon between Jan. 1, 2008 and Dec. 31, 2011, and who meet other criteria. They will receive up to $2,000 each.