As promised, this week was absent of any real significant economic news and the lack of market movement reflected that.  The main focus of investors has been the meetings in Greece working to avoid a default on the countries debt.  It appears that they are making progress in coming up with a plan however it is a painfully slow process and undoubtedly once an agreement is reached, many will speak up in objection to the plan.  Unfortunately we have seen this scenario play out over and over in many European nations for the past year.

The big headline announced on Thursday is the 26 billion dollar settlement reached between the nation’s 5 largest banks and 49 state attorney generals.  The settlement is to compensate and assist homeowners that have been either foreclosed on improperly, or homeowners that owe significantly more than the value of their home.

 The basics of the plan are as follows: 

• 17 billion dollars will be used to reduce principle balances for underwater borrowers and assist homeowners that are behind on payments.
• 3 billion dollars will go towards refinancing mortgages for borrowers that are underwater but current on their payments.  This will enable these borrowers to take advantage of the incredibly low mortgage rates.
• 5 billion dollars will go to state and federal governments to enable them to fund payments to homeowners that have lost their homes due to improper foreclosure proceedings.
• The remaining 1 billion dollars will be paid directly by Bank of America to the Federal Housing Administration to settle charges that its subsidiary, Countrywide Financial, defrauded the housing agency.

 The final piece of the settlement is that the banks will eliminate robo-signing all together and use proper legal procedures in completing foreclosures.

 It has been a while since you have heard me be critical of anything, however I must break down this settlement for you so you can see the reality of this settlement.

 The settlement states that borrowers that are “severely underwater” will receive money for principal reduction.  The irony is that the average principal reduction will be about $20,000.  If a borrower is “severely underwater” isn’t their negative equity much greater than that?  Do you really think $20,000 is going to incentivize a borrower that is $80,000 or more under water to start making payments? $20,000 is $20,000 but will it help those underwater? Who will be chosen and how many Americans that are paying on time but cant refinance because their home is underwater will feel left out?

 Secondly, imagine you are a homeowner that was improperly foreclosed on, you lost your home, your life has been uprooted illegally, and now you receive a check for no more than $2,000.  Let’s see, your house was illegally taken from you but you now have $2,000 in your hand…if it happened to me $2,000 would not make me feel much better. (I am not suggesting that homeowners that lost their homes illegally in foreclosure, would not have eventually lost them, however the law needs to be followed and then when followed properly financial institution should have every right to foreclose and sell the home ASAP) 

Lastly, 20 billion of the total settlement will be paid out gradually as claims are approved.  None of the 5 banks are writing checks for anything more than 1 billion up front.  All other money to be paid out will come as claims are settled and agreed upon.  To put it in perspective, think for a moment how long does it take for these banks to approve short sales, or properly process a foreclosure, or complete a loan modification? (Average on all counts is 6-9 months or more) Do you really think they are going to process these claims quickly? 

As your mortgage professional, I am happy to assist you with any information you may need regarding mortgage or real estate information.  I welcome the opportunity to serve you in any way I possibly can.  Please feel free to reach me at 661-505-4300.

Authors: Fred Arnold

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