Illinois, California and at least six other states have reached an $8.8 billion settlement of their lawsuits against Countrywide Financial, the biggest subprime mortgage lender, in a deal that should help hundreds of thousands of Americans keep their homes.
Bank of America, which purchased Countrywide earlier this year as several states' attorneys general were investigating allegations of fraud against the lending giant. In settling the lawsuit, Bank of America. promised to work out new mortgages at interest rates as low as 2.5 percent and pay cash compensation to people who already have lost their homes.
As many as 12 states may participate in the deal by the time an official announcement is made early today on a deal worked out last week even as wrangling over the $700 billion federal financial bailout program riveted world attention. The states and Bank of America expressed hope that the settlement terms would set a model for other lenders trying to reset new payment schedules for borrowers at risk of foreclosure.
The deal is by far the most aggressive worked out since the subprime mortgage fiasco began spinning dangerously out of control, helping fuel a severe housing crisis that eventually pushed the nation's financial system to the brink. In the settlement, billions of dollars will be provided in direct loan relief, affecting an estimated 400,000 borrowers nationwide.
Illinois, California, Iowa, Ohio, Texas, Arizona, Washington and Connecticut had agreed to the Countrywide settlement program by early yesterday evening. North Carolina, West Virginia, Indiana and Michigan were still in settlement talks, a Countrywide spokesman said.
The settlement marks the first mandatory mortgage relief program in the nation. Mortgages will be renegotiated under the program so that total monthly payments do not exceed 32 percent of a family's monthly household income.
In some cases, terms of mortgages will be changed to reflect the reduced value of homes as a result of the housing crisis. But in most cases the emphasis will be on reducing monthly payments, said a lawyer involved in talks with Countrywide.
The bulk of the settlement - $8.4 billion - represents the reduction in principal and interest payments for Countrywide customers who hold adjustable-rate and fixed-rate subprime mortgages. In addition, Countrywide expects to waive $56 million in prepayment penalties and $79 million in late fees. The firm will pay $150 million to people already forced out of their homes and another $60 million in relocation costs for people in the process of being forced from their homes.
The New York Times contributed to this article.