The Devil is in the Details

by Sally Colton

The Devil is in the Details: Holes in the $25 Billion Dollar Mortgage Settlement and What it Means for Arizona

The Skinny

On February 9, 2012, five of the nation’s largest banks agreed to pay a total of $25 billion to 49 states, excluding Oklahoma, in order to help resolve some of the issues caused by the recent housing crisis.  At $1.6 billion, Arizona will receive the third largest settlement amount, behind California and Florida. This funding is intended to help both those who have lost their homes due to faulty foreclosures, and people who are severely underwater in their homes and may need principle and interest reductions in order to keep making payments on their mortgages.

The Issues

While this is a great start to moving us forward out of the recession, a closer look at the settlement agreement raises a few concerns that need to be addressed.

First of all, while Ally/GMAC, Wells Fargo, JPMorgan Chase, Citibank, and Bank of America are forced to recognize some culpability in this disaster, other participants in the market like Freddie Mac and Fannie Mae are getting off scot-free.

Freddie and Fannie were big players in the process of securitization of residential mortgage loans. Before the market crash, they purchased loans from banks or other lenders in order to give banks more money to lend. After purchasing the loans, Freddie and Fannie then helped bundle up these loans with other loans and then sold them off to investors in big, pretty loan packages. At first this seemed like a great idea, but when everything hit the fan, it was difficult for lenders to determine who owned these pretty packages that Freddie and Fannie had sold off.

While Freddie and Fannie aren’t totally to blame for everything that has happened, they still control more than half of all outstanding mortgages. Not being a part of the settlement means that the countless homeowners with Freddie or Fannie mortgages won’t be eligible for assistance through these funds.

Another problem with the settlement is the $110 million that will be set aside for people who lost their homes between 2007 and 2011 due to lender misconduct. On its face, it sounds like a great step in the right direction. The problem is that people will merely have to allege that they were wrongly foreclosed on; they can just “check off a box” to say they felt they were subject to servicer abuse. Maybe I’m not your average bear, but I’m pretty sure if my house was foreclosed on, no matter what the circumstances, I would feel like I was being abused by the bank. So, unless we’re making the assumption that everyone who was foreclosed on in Arizona between 2007 and 2011 was subject to servicer abuse, people should at least have to provide an explanation of the events and communications that took place between themselves and their bank before they lost their house. These funds are limited. It’s important that they go to people who really are in need of the financial support.

Good News for Arizona

The Arizona Attorney General will also be receiving $10 million from Bank of America to prevent future faulty foreclosure and help mitigate the giant impact of the mortgage and foreclosure crisis in Arizona.

The only thing we have left to hope for is that the government will actually pull through and enforce this agreement, so that people in need can start seeing a difference in their mortgage payments.

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