Bank Foreclosure Settlement – Too Little, Too Late?

The housing bubble continues to percolate. For years banks engaged in loan and mortgage practices that took advantage of consumers. Now it looks like the tables are starting to turn and relief for some eligible borrowers is on the way. However, some homeowners are wondering if the bank settlements are too little, too late?

At the beginning of 2008 people who purchased homes at the peak of the market or refinanced were now under water on their mortgages, owing more for their home than it was actually worth. This led people to fall behind on their mortgage payments and lose their house in foreclosure.

This had a devastating effect on many communities leaving many abandoned properties and several blighted neighborhoods.

Homeowners complained that mortgage companies made multiple errors while managing their loans and, in some cases, those errors forced them into foreclosure and left them with little to no hope of regaining the property they had lost. Homeowners also complained that some foreclosures occurred without lawful paperwork, e.g. a bank couldnt even prove that it had a mortgage on the home. Lawsuits have been filed alleging various practices banks engaged in were illegal, fraudulent and corrupt.

As a result regulators in 2011 required 14 banks to hire consultants to review hundreds of thousands of foreclosure files for defects. While examining foreclosure files, the consultants found patterns of inappropriate fees, unlawful denial of modifications, subpar paperwork, botched loan modifications, and robo-signing of documents for use in the foreclosure procedures without properly reviewing them for accuracy.

After more than a year of reviews and analysis by consultants, the regulators realized this process was taking far too long and providing no relief to consumers. A settlement was reached with the banks in January, where consumers may receive some compensation for the banks wrongful conduit. Ten mortgage companies will pay $8.5 billion for foreclosing on families that should have been allowed to stay in their homes. Of the $8.5 billion, $3.3 billion is earmarked for direct payments to eligible borrowers whose foreclosures were handled improperly. The remaining $5.2 billion will help struggling borrowers with programs such as loan modifications. Press Release

This new deal is separate from the $25 billion mortgage settlement involving five large banks and the state attorneys general in early 2012, though many allegations of misconduct are the same. Press Release

In addition to the two settlements, the Federal Reserve announced that the Goldman Sachs Group and Morgan Stanley have agreed to pay $557 million and provide other assistance to borrowers to end a case-by-case review of foreclosures. The two banks will pay $232 million to eligible borrowers and $325 million in loan modifications.

Under this agreement, more than 220,000 borrowers will receive cash compensation. Eligible borrowers, who were in foreclosure in 2009 and 2010, are expected to receive some compensation ranging from hundreds of dollars up to $125,000, depending on the type of error.

With the announcement of these new settlements there is some relief for homeowners on the horizon. However, the above settlements are just a fraction of compensation compared to the total loss created by the U.S. mortgage crisis.

In 2009 the U.S. Government coined the phrase too big to fail, spending nearly $23 trillion of taxpayer money to save large banks and financial companies and pull back the economy from the abyss. During 2008-2009 home prices tanked, leading to an estimated loss of $7 trillion for homeowners, the stock market decline brought another $11 trillion in losses, and retirement accounts lost $3.4 trillion. So the question remains, is the announcement of the foreclosure settlements too little, too late?

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