By Lorraine Woellert and David McLaughlin
WASHINGTON - Five banks will pay $26 billion to end a nationwide investigation of abusive foreclosure practices stemming from the collapse of the housing bubble, a senior administration official said.
The U.S. Justice Department and Department of Housing and Urban Development will announce the resolution of the 16-month probe this morning. Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. are among the banks -- the nation’s five largest servicers -- participating so far.
The $26 billion agreement includes $5 billion in cash for states, $17 billion to help borrowers in the form of mortgage debt forgiveness, forbearance and short sales, and $3 billion in refinancings to lower homeowners’ interest rates, the official said in a phone call with reporters.
The total figure could grow to $40 billion if the next nine largest mortgage servicers sign on to the agreement, the official said. In a best-case scenario, if banks participate fully, the deal could be worth $45 billion to homeowners and victims of foreclosure.
Terms of the settlement were to be announced at a press conference in Washington by Attorney General Eric Holder and Housing Secretary Shaun Donovan.
The settlement comes more than a year after attorneys general from all 50 states announced an investigation into foreclosure practices following disclosures that banks were using faulty documents to seize homes. The agreement was reached with a group of state attorneys general and federal agencies, including the Justice Department.
The goal is to not just punish banks responsible for botched foreclosures but repair damaged neighborhoods, said the administration official, who briefed reporters on condition of anonymity in advance of the official announcement.
“One of the things we’re concerned about is the broader impact on families and neighborhoods,” the official said. “This won’t only require lenders to pay for the misdeeds but force them to fix the problems.”
The official described the principal forgiveness as the largest since the crisis began.
Borrowers whose loans are owned by banks and haven’t been pooled into mortgage bonds will be most likely to benefit from the agreement, the official said. Borrowers who suffered foreclosures from the start of 2008 through 2011 will be eligible for payment.
The actual amount of restitution to individual borrowers will depend on how many make claims, with the official estimating that each borrower could get between $1,500 and $2,000.
Banks must spend the money within three years or face a fine. The proposal must be approved by a federal judge.
About $5 billion of the payment will go to states that sign on to the agreement to pay for foreclosure-related initiatives, according to the administration official. About $17 billion will fund payments to homeowners who have lost their homes to foreclosure. The servicers also will refinance $3 billion worth of mortgages and pay about $1.5 billion to homeowners harmed by botched foreclosures.
The money has to be spent within three years, and banks will get extra credit for funds distributed in the first 12 months, the official said. All 50 states were expected to sign on to the agreement.
New York Attorney General Eric Schneiderman and California Attorney General Kamala Harris agreed to join the settlement Feb. 8, a person familiar with the matter said.
‘A Huge Deal’
“With California and New York signing on, it’s a huge deal,” said Kurt Eggert, a professor at Chapman University School of Law in California who has been following the talks. “California and New York were the biggest critics of this deal, so if they sign on, that’s a sign that this is a real deal.”
The settlement preserves any state and federal criminal claims, claims related to mortgage securitization, including those under New York’s securities fraud statute, and fair lending laws, and claims brought by individual homeowners, among other matters, the official said.
The resolution also establishes a monitor to track compliance with the terms of the agreement.
The 50-state investigation, announced Oct. 13, 2010, came after New York-based JPMorgan, the largest U.S. bank by assets, and Ally Financial’s GMAC mortgage unit said they would stop repossessions in 23 states where courts supervise home seizures, and Charlotte, North Carolina-based Bank of America froze foreclosures nationwide.
Ally, based in Detroit, was first to freeze evictions in September 2010, after depositions in lawsuits challenging foreclosures surfaced showing that employees signed affidavits containing information they didn’t personally know was true. In December 2009, a GMAC employee said in a deposition in a foreclosure case filed in West Palm Beach, Florida, that his team of 13 people signed about 10,000 documents a month without verifying their accuracy.
The attorneys general began negotiating first with the five largest servicers because they held almost 60 percent of home loans, Miller has said.
Bank of America, JPMorgan, New York-based Citigroup, San Francisco-based Wells Fargo and other mortgage servicers have also been required by the Office of the Comptroller of the Currency to improve their foreclosure procedures. The OCC in April 2011 announced enforcement actions against the companies for “unsafe and unsound” practices related to loan servicing and foreclosures.