Did California’s Attorney General secure enough relief for the state most impacted by the foreclosure crisis?
- No (100%, 13 Votes)
- Yes (0%, 0 Votes)
Total Voters: 13
This article reviews the recent national foreclosure settlement and forecasts its effect on California homeowners still facing default and foreclosure.
Harris’s white whale
After months of negotiations, California Attorney General (AG) Kamala Harris announced California’s participation in the $26 billion national settlement against five banks. Last fall, the California AG withdrew from the settlement since the $4 billion California would have received was deemed insufficient for the state with the largest number of foreclosures in the nation. Under the new terms, California will receive $18 billion.
The deal began in late 2010 when several states investigated claims of large banks robo-signing loans, the practice of one bank official signing an enormous amount of documents, making it impossible to verify all of the information contained in each document due to the sheer number of documents signed. The agreed-to settlement applies to robo-signing and other mortgage-servicing-related claims, but still allows for future lawsuits addressing fair housing, civil rights claims and loan securitization— a huge victory for slighted California homeowners. [For more information on foreclosure practices and robo-signing, see October 2010 first tuesday article, BofA postpones organic economic recovery by halting foreclosures.]
About 60% of California homeowners have loans owned by Freddie Mac and Fannie Mae (collectively called Frannie), and although these are not included in the settlement, the California AG claims she will continue to pursue principal reductions for homeowners whose loans are owned by Frannie. She is also forming legislation to enforce a single point of contact for mortgage borrowers, and to address the system of dual-track foreclosures, which occur when a homeowner is simultaneously going through foreclosure and the loan-modification process.
The five banks involved in the settlement are (in order of amount due under the settlement):
- Bank of America;
- Wells Fargo;
- JPMorgan Chase;
- Citigroup; and
General figures for financial relief allocate $12 billion for principal reductions, with the following geographical areas receiving the most aid from the settlement:
- Los Angeles ($3.92 billion);
- Riverside ($1.59 billion);
- San Bernardino ($1.13 billion);
- Sacramento ($820 million); and
- Stanislaus County ($368 million).
Further settlement funds are allocated accordingly:
- $849 million is purposed to refinance 28,000 home loans;
- $279 million will be delivered as restitution to 140,000 improperly foreclosed borrowers;
- $1.1 billion will be divided between payment assistance for unemployed homeowners and aid to displaced homeowners for relocation costs;
- $3.5 billion is assigned to fulfill 32,000 unpaid loans remaining after foreclosure; and
- $430 million will be delivered to California’s Attorney General’s office.
A homeowner may qualify for settlement funds in several situations, including:
- the home loan must be owned or serviced by one of the five settling banks;
- to receive a cash settlement , the home was foreclosed between January 1, 2008 and December 31, 2011;
- to be eligible for refinancing, the home is currently in foreclosure; or
- to be eligible for refinancing, the homeowner is currently underwater , paying at least a 5.25% interest rate, and current on the loan with no delinquencies within the past 12 months. [For more information regarding settlement figures and requirements, see the State of California Department of Justice.]
There is no date when relief will be distributed, as the logistics are still being worked out. However, banks can be expected to implement the modifications and payments in the next six to nine months and continue to execute them over the next three years. In that time period they will send letters to borrowers eligible to receive relief, and borrowers can contact the mortgage servicer listed on their mortgage statement or visit the settlement’s website to find out how to submit an application for relief. Additionally, homeowners can contact a free counselor approved by the Department of Housing and Urban Development (HUD) by calling 1-800-569-4287.
Is $18 billion enough?
When California’s AG first rejected the $4 billion settlement offered by the big banks, she claimed it insufficiently addressed the needs of Californians and let misbehaving banks off the hook. When she returned to negotiations, she got what she wanted. True, $18 billion is more than four times the amount offered under the first settlement, and consists of more than 70% of the national lawsuit. However, is it enough?
As of November 29, 2011, 30% of California homeowners – more than two million – had negative equity, or were underwater, according to CoreLogic. At that time, homeowners owedjust over $1 trillion in negative equity in California. For some perspective, the amount the settlement has offered California is less than 2% of the state’s total negative equity. Therefore, in order for the settlement money to have a real effect, it will have to be distributed successfully. [For more data regarding California’s foreclosure rates, see January 2012 first tuesdayMarket Chart, NODs and trustee’s deeds: less depressed but still grim.]
$12 billion of the settlement will go to reducing the principal debt on loans via cramdowns (the best outcome for an underwater homeowner) and shortsales. This multibank settlement may help a fraction of homeowners in need, but the majority of borrowers will still be tied to their black hole assets, unable to resell their properties because of the debt that would remain and the lenders’ reluctance to accept a loss. The continued existence of these black hole assets will prolong the stagnation of the current real estate market. Bottom line: a healthy real estate market requires sales — movement which is halted entirely by negative equity. [For more information on the need for cramdowns, see February 2010 first tuesday article, Cramdowns shot down: another missed opportunity.]
A small step in the right direction
Instead of allocating these funds like band-aids to cover hemorrhaging financial wounds, allocators should take a step back and look at the bigger picture. Shortsales are the least effective method to reduce California homeowners’ negative equity, due to the lack of buyers in the current market.
The best way to prevent neighborhoods blighted by foreclosures is to keep owners in their homes. If brokers and agents support the effort in this way, they may not experience the same short-term benefits that shortsales provide, but in the end, the market will recover more quickly and more solidly, paving the way for more fees in the future.
$18 billion is a good start, but let’s hope the AG is as successful with squeezing blood out of the giant turnip known as Frannie. [For more information on Frannie’s intractability regarding principle reductions, see November 2011 first tuesday article, Surprise: Frannie says “no thank you” to cramdowns.]