Renzo Salazar maintains the yard around a foreclosed home after the bank hired him to keep the home from falling into complete dilapidation on November 10, 2011 in Miami, Florida.
By John Schoen
As the clock ticks down on year-long?negotiations on a sweeping?mortgage relief settlement, the architects of the joint state-federal plan believe?it would be better for homeowners to get a partial deal?than nothing at all, according to sources close to the talks.
Facing a Monday deadline, attorneys general in all 50 states weighed the terms of a proposed $25 billion settlement designed to force five big lenders to pick up the pace of rewriting mortgages for homeowners struggling to make their payments.
Several states, holding out for tougher terms, have threatened to derail the negotiations, which have included federal officials from the Departments of Justice, Treasury and Housing and Urban Development, along with the five biggest U.S. banks, including Bank of America, JP Mortgage Chase, Ally Financial (formerly GMAC), Citigroup, and Wells Fargo.
Late Monday, Iowa Attorney General Tom Miller's office, which has lead the settlement talks on behalf of the states, said that "more than 40" states had signed on as the deadline passed.
"This enables us to move forward into the very final stages of remaining work," Miller said in a statement. "Federal and state officials, as well as representatives from the banks, continue to address matters that they must complete before finalizing any settlement."
Miller's office provided no additional details.
For months, the holdout states?-- including New York, California, Nevada, Delaware and?Massachusetts --?have cast doubt on whether a deal could be reached. New York Attorney General Eric Schneiderman, who was dismissed from a negotiating committee in August for allegedly trying to undermine the deal, on Friday filed suit against three of the banks challenging their use of a mortgage registry that is critical to their foreclosure efforts.
Scheiderman?s appointment by the Obama administration last month to co-chair a state-federal mortgage fraud investigation team was widely seen as an effort by the White House to get him on board the settlement deal.
California Attorney General Kamala Harris, who walked away from negotiations last year, and who last week again rejected the deal as ?inadequate,? was reportedly in last-minute talks Monday with the White House to try to resolve her objections.?California may be?critical to the success of any deal because it remains ground zero of the housing crisis. Roughly one in four of all foreclosures are happening in the state and?ten of the top 20 metro areas with the highest foreclosure rates in 2011 are there, according to RealtyTrac.
Massachusetts?Attorney General Martha Coakley filed suit against the five banks in December for illegal and deceptive foreclosure practices.
The five big banks are expecting to get relief from such lawsuits if they agree to the settlement. Coakley said last month that calls?about mortgage and foreclosure problems, after quadrupling over the past two years, have become her office?s most common consumer complaint.
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After the widespread failure of the government?s Home Affordable Modification Program, or HAMP, to stem the ongoing wave of foreclosure, the Obama administration has been pressing the states hard to come up with a settlement that bankers would approve. Despite several announcements that both sides were close, an agreement has proved elusive. Now, with some states still wavering, the administration is weighing whether a partial deal is its best option.?
The latest version of the settlement would take a multi-pronged approach to unraveling the aftermath of the mortgage mess that sank the housing market, tossed more than seven million households on the street, and created a legal morass for lenders and a red tape nightmare for borrowers trying to modify their loans and keep their homes.
One major component involves a detailed set of procedures that banks would agree to follow in processing foreclosures. Spelled out in dozens of pages, a complex set of rules would try to end some of the most abusive practices that began surfacing two years ago in private lawsuits challenging ?robo-signing? and other deceptive and fraudulent practices. In return, lenders would be granted relief from civil actions challenging those practices from the AGs that sign on to the deal. (Individuals would be free to continue filing lawsuits against banks for deceptive and illegal foreclosures.)
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The other major component of the state-federal settlement centers on a promise by the big five lenders to expand the volume of loans they modify for homeowners who are struggling to make their monthly payments. Depending on how many states sign on,? lenders would be required to write as much as $17 billion worth of modifications by applying a series of strategies, including?writing down principal,?cutting interest rates, or lowering monthly payments.
The settlement would grant bankers credits toward the $17 billion figure, based on a complex formula that gives bankers more credit for the most costly strategies. The least costly modifications might earn a lender as little as a nickel; the costliest would generate a dollar-for-dollar credit. ?The banks would be required to use a minimum portion of credits?to cut principal balances, a modification most lenders have balked at under the voluntary HAMP program.
Lenders have two years to generate credits worth 75 percent of the total and three years to meet the full goal. The proposed $17 billion target could be scaled back depending on how many states ultimately agree to the deal.?
If the pace of loan modifications falls short, lenders will have to pay the government a penalty by converting the remaining unearned credits into cash. A monitoring committee of state and federal officials will track the pace of modified loans, with penalties kicking in after 24 and 36 months if the lender fall short of targets spelled out in the deal.
The settlement also tries to resolve one of the thorniest problems clogging the modification process: the widespread conflict when different lenders hold first and second mortgages on the same property. Rewriting a first mortgage typically leaves the holders of the second mortgage empty handed. Under the terms of the proposed settlement, the five banks would agree to work together and negotiate losses on those second liens.
To sweeten the deal for the states, a portion of the settlement would be paid in cash to fund two separate programs. One would divert money to local foreclosure relief programs in states that sign on. The other would?provide cash settlements, averaging about $1,800, to homeowners who can show they were subjected to abusive practices or wrongful foreclosures. (Detailed procedures for those claims have yet to be resolved.)
The authors of the deal believe the system of credit will give the states more leverage in accelerating the pace of loan modifications; bankers get more credit for modifying loans in the first year, for example. Based on other incentives built into the credit formula, lenders could eventually provide as much as $32 billion in loan relief to meet the $17 billion in credits, according to a source close to the talks.
But proponents of the deal concede that, even if all works as planned, the universe of households that would be eligible is relatively small. The settlement would apply only to loans held on the books of the five big banks. That would exclude homeowners whose mortgages are owned or guaranteed by Fannie Mae and Freddie Mac, the government-sponsored lenders?that hold more than half of all U.S. mortgages. Loans sold off by the banks to investor-owned mortgage pools would be subject to modification only?if the contracts that created those pools allow it.
Should your state agree to a $25 billion mortgage deal with the five biggest banks?
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