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A SPECIAL SECTION:  Haiti since the January 12, 2010 Earthquake
Posted February 10, 2012
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Mortgage Plan Gives Billions to Homeowners, but With Exceptions

As state and federal authorities announced the details of their $26 billion mortgage settlement with big banks on Thursday, millions of American homeowners were hoping that this time they would finally get relief.

Benjamin Petit for The New York Times

The $662,000 that Carlos Sandoval de Leon owes Wells Fargo on his Brooklyn brownstone is excluded from the settlement with big banks because the mortgage is held by a private investor.


Some, like Jessica Cooper of Toledo, Ohio, will discover the program’s limitations.

Since she was laid off in June 2009, Ms. Cooper and her husband have been pressing Bank of America to modify the terms of the $112,000 mortgage on their home. But because the loan is owned by the Federal Housing Administration, it is not covered. Similarly, Carlos Sandoval de Leon has been seeking a break from Wells Fargo on the $662,000 he owes on a Brooklyn brownstone. But because that mortgage is held by a private investor, it too falls outside the scope of the agreement, which mostly covers loans held by the banks themselves.

The bulk of the settlement, about $20 billion, would go to one million American homeowners who would have their mortgage debts reduced or their loans refinanced at a lower interest rate. It also includes $1.5 billion for roughly 750,000 people who lost their homes to foreclosure between 2008 and 2011, with each receiving between $1,500 and $2,000.

Economists do not expect a big boost for the economy, in part because the banks have three years to distribute the aid. Some experts questioned whether the accord would do much to stabilize the housing market and its glut of millions of foreclosed homes.

Critics also pointed to the fact that millions of mortgages owned by the government’s housing finance agencies, Fannie Mae and Freddie Mac, would not be covered under the deal, excluding about half the nation’s mortgages.

“The effect of this settlement will be catalytic,” Shaun Donovan, the secretary of Housing and Urban Development, said in an interview.

He predicted it would spur more loan modifications through existing government programs as well as principal reductions — when loan debt is written down for borrowers who owe more than their home is worth — as well as additional mortgage relief provided by banks.

“We do believe there should be principal reduction at Fannie Mae and Freddie Mac,” he added. “We’ve been disappointed that this hasn’t happened thus far.” He said the government had proposed incentives for Fannie and Freddie to cut loan balances under an existing program, and the two mortgage giants were studying the idea.

Advocates for homeowners facing foreclosure expressed cautious optimism after the settlement was announced Thursday morning in Washington. “We’re hopeful,” said Joseph Sant, a lawyer at Staten Island Legal Services’ homeowner defense project. “But we had a lot of programs that are good on paper. What will make the difference is that it’s vigorously enforced.”

President Obama declared the deal the largest federal-state settlement in the nation’s history.

“No compensation, no amount of money, no measure of justice is enough to make it right for a family who’s had their piece of the American dream wrongly taken from them,” he said. “And no action, no matter how meaningful, is going to by itself entirely heal the housing market. But this settlement is a start.”

Homeowners in two states — Florida and California — will reap more than half of the $26 billion settlement, a reflection of the disproportionate number of loans that are delinquent or exceed the value of the underlying property there, government regulators said.

The amounts from individual banks were linked to their share of the servicing market. The biggest, Bank of America, would provide $11.8 billion, followed by $5.4 billion from Wells Fargo, $5.3 billion from JPMorgan Chase, $2.2 billion from Citigroup and $310 million from Ally. Bank of America would contribute an additional $1 billion for Federal Housing Administration loans.

And if nine other major mortgage servicers join the pact, a possibility that is now under discussion with the government, the total package could rise to $30 billion.

Banks stocks were mixed in trading Thursday, but shares of Bank of America rose 0.62 percent to $8.18, its highest level since September. Much of the money to pay for the settlement has already been reserved, and investors expect the settlement to remove at least one legal worry for Bank of America.

More than just an attempt to aid consumers and stabilize the housing market, government officials cast the settlement as an effort to finally hold banks accountable for their misdeeds, more than three years after the mortgage collapse brought on a full-scale financial crisis.

The deal is about “righting the wrongs that led to the housing market collapse,” said Eric H. Holder Jr., the United States attorney general. “With this settlement, we recover precious taxpayer resources, fix a broken system and lay a groundwork for a better future.”

The agreement does not release banks from a variety of other suspected misdeeds. Regulators and prosecutors could still pursue allegations of fraud in the process by which those loans were made, known as origination, and the packaging of those mortgages into securities sold to investors by the big banks.

“We’re going to keep at it until we hold those who broke the law fully accountable,” Mr. Obama said. The agreement also imposes new standards that banks will have to follow as they deal with distressed homeowners. Mr. Donovan said the settlement would “force the banks to clean up their acts. No more lost paperwork, no more excuses, no more runaround.”

Though some mortgage advocates praised the settlement as a needed step in the right direction, Katherine Porter, a law professor at University of California Irvine, was more skeptical.

“We have to look at this as being a modest settlement even thought the number itself, the $26 billion, is an eye-popping number,” said Ms. Porter. “There are millions of people who have lost their homes and this settlement will only affect a relatively small number of them.”

She was also surprises at the time — three years — that the servicers were being given to put the settlement into effect.

“That reflects to me a lack of urgency. That the banks don’t think it is urgent or they still haven’t gotten the staff, technology, ethos or platforms set up to help people quickly,” said Ms. Porter.

“That three-year window makes me really nervous because a lot of people could be out of their homes by then.”

What is more, other critics are raising questions about so-called moral hazard, the danger that more relief encourages homeowners to default in the hopes of getting aid. News of the settlement also reignited resentment from homeowners who are current on their payments, and have shunned government aid.

Some state attorneys general closely involved with the settlement acknowledged that it provided only a small amount of restitution to individuals who lost their homes in foreclosures, even though they said their investigations uncovered rampant evidence of robo-signing and enormous problems with the servicing aspects of the loans.

“This agreement is more important for the foreclosures we’re hoping to prevent,” said Roy Cooper, the attorney general for North Carolina.

For homeowners like the Coopers and Mr. de Leon there is still hope, even if it won’t come through Thursday’s settlement. Both Bank of America and Wells Fargo said Thursday they were exploring other options that could prevent foreclosure.

Shaila Dewan contributed reporting.

Copyright 2012 The New York Times Company. Reprinted from The New York Times, Business, of Friday, February 10, 2012.

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