This post was updated at 1:25pm
It’s been a long slog, but government officials and representatives from major U.S. banks have come to terms on a settlement that would put an end to federal and state investigations into alleged foreclosure abuses by financial institutions.
Details of the settlement were announced this morning, and a website explaining the plan went live today as well. President Obama also gave a statement at the White House saying the deal “will begin to turn the page on an era of recklessness that has left so much damage in its wake.”
The five major banks involved in the settlement: Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial will pay roughly $25 billion in penalties and relief to borrowers, states and the federal government. According the terms outlined today, the big banks will pay:
- $20 billion in direct consumer relief, with $17 billion going to principal reduction, and $3 billion to help underwater borrowers refinance their mortgages at lower rates;
- $4.25 billion of cash will be distributed to states, with $1.5 billion going out as checks to borrowers who were victims of foreclosure abuses, and $2.75 distributed to state governments to help with foreclosure prevention efforts; and
- $750 million will be paid to the federal government to pay for similar efforts.
Borrowers who were victims of foreclosure abuses must file claims to receive cash payments, which will range from $1,500 to $2,000 depending on how many claims are filed. Reports indicate that roughly 750,000 homeowners would be eligible to file claims.
The deal should create much more certainty for the banks going forward, and the amount of cash the banks are required to forfeit is quite small. However, the suit leaves open room for states attorneys general and individuals to bring additional suits related to mortgage securitization, and to bring suits against MERScorp, a company created by large banks to streamline the process of transferring mortgage ownership during the securitization process.
The deal is also a win for states attorneys general and the administration, who can now point to this settlement, the largest of its kind since the tobacco settlement of the 1990s, as concrete action taken to right the wrongs perpetrated by the mortgage industry leading up to and following the financial crisis.