Monday, February 13, 2012

Arizona gets $1.6 billion in mortgage fraud settlement

Marking a watershed day in the aftermath of the national housing crash, Arizona officials announced a pair of settlements with large banks over allegations of improper lending and foreclosure practices that will result in more than a billion dollars of aid for struggling homeowners.

Arizona's portion of a nationwide, $26 billion settlement with the country's five biggest lenders will be $1.6 billion, the third-largest share after hard-hit California and Florida.

Most of the money in that deal, announced Thursday after negotiations by attorneys general across the country, will be paid out by lenders in the form of principal reductions -- cutting the amount of money that certain borrowers are responsible for repaying on their home loans. Lenders will also dedicate part of the funds to reducing other borrowers' interest payments and will issue $2,000 payments to people who lost homes in improperly managed foreclosures.

A second, smaller settlement with Bank of America ends a state lawsuit over the bank's lending practices and will fund consumer protection and future investigation of mortgage lending.

The national settlement will not deliver assistance to every struggling homeowner. It applies only to mortgages held by the five large lenders and does not extend to borrowers with loans backed by federal mortgage giants Fannie Mae and Freddie Mac, who make up more than half of all mortgage-holders.

Still, federal officials estimate that 60,000 Arizona borrowers could see assistance with their principal or interest rates. And the settlement marks the first time lenders have agreed, on any large scale, to forgive money owed by underwater borrowers.

"These settlements will help Arizona homeowners and the state's economy that is so tied to housing," Arizona Attorney General Tom Horne said. "I think we are holding banks accountable."

Who benefits

Only borrowers with loans owned by BofA, Citigroup, the former GMAC (now known as Ally Financial), JPMorgan Chase and Wells Fargo are eligible for aid from the national settlement. The five lenders are responsible for contacting eligible homeowners in the coming month to offer assistance.

The deal requires the banks to reduce loans for about 1 million households that are at risk of foreclosure. The lenders will also send $2,000 each to about 750,000 Americans who were improperly foreclosed upon from 2008 through 2011. The banks will have three years to fulfill terms of the deal.

Borrowers who had loans originally issued by the five participating lenders but then had their mortgages sold to another bank aren't eligible.

About $1.3 billion of Arizona's $1.6 billion will go toward principal reductions. Federal officials estimate the national average for principal reductions will be $20,000 per loan. In Arizona, where home prices have fallen 60 percent, many homeowners are likely to be underwater by far more than $20,000.

Horne said homeowners whose mortgage balances are 175 percent or more of their current home values and who are current on their payments will probably be the first to receive principal reductions.

Nationally, at least $17 billion of the settlement is to go directly to reducing principal. Details on how much lenders will reduce the amount borrowers owe aren't available yet.

About $86 million of Arizona's share of the deal will go toward offers to modify borrowers' loans by lowering interest rates. An additional $110.4 million has been set aside to compensate Arizona borrowers who lost their homes to foreclosure from 2008 to 2011 and believe they suffered unfair treatment by lender servicers. Each borrower is eligible for $2,000.

Horne said that any former homeowner who thinks he or she qualifies for the $2,000 should contact the lender and that little documentation will be required to receive this compensation.

Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, said 55,000 former Arizona homeowners will qualify for the $2,000 payments. During the housing crash, more than 175,000 borrowers have had Arizona homes taken back by lenders, though that figure includes loans held by Fannie and Freddie.

Arizona will receive $102.5 million to be used for mortgage-fraud investigations and consumer counseling.

Arizona State University's real-estate analyst Mike Orr said reducing mortgage principal for underwater homeowners will "significantly bolster the housing market" if it entices more people to stay in their homes and keep making payments.

Almost 50 percent of the state's homeowners are underwater, meaning homeowners owe more than their homes are now worth because values have plunged by more than half since the market's peak in 2006.

Patricia Garcia Duarte, president of the Phoenix-based housing non-profit Neighborhood Housing Services, said the settlement looks like a lot of money to help both former and current homeowners. However, she said the damage done to Arizona families and communities has been extreme.

"The funds will definitely help," Garcia Duarte said. "But how the funds are spent in Arizona will determine the success in our housing recovery."

BofA lawsuit

Arizona is also receiving $10 million through the settlement of a lawsuit with BofA over allegations of mortgage fraud and deceiving borrowers trying to obtain loan modifications.

The money will go toward funding criminal loan investigation and consumer education. Horne said it's not clear yet whether the BofA borrowers who served as plaintiffs will be compensated from the $10 million or the state's $1.6 billion from the national settlement.

The suit, filed in December 2010 by the state's attorney general, had to be reconciled for Arizona to participate in the national settlement.

"If we had continued to litigate the BofA lawsuit, we might have recovered more money," Horne said. "But the lawsuit could have taken another five to six years. By settling now and joining the national settlement, more homeowners will receive help sooner."


The deal establishes a regulatory group of local and federal government agencies. It calls for North Carolina's banking regulator Joseph Smith to monitor lenders for compliance.

Horne said lenders will be subject to hefty fines if they don't follow through with the actions to help homeowners laid out in the settlement.

Federal officials said states could receive more funding if more mortgage firms sign onto the agreement. One estimate is for the national settlement to grow to $40 billion if the next nine large lenders join in. The only state not part of the national settlement is Oklahoma. Arizona, California, Florida, New York and Nevada were the last states to join. Arizona's negotiations with BofA over the mortgage-fraud lawsuit went on until almost 11 p.m. Wednesday night.

President Barack Obama said in a speech Thursday that the $26 billion settlement will allow the nation's biggest banks, "banks rescued by taxpayer dollars," to right wrongs committed in making loans and foreclosing on homeowners during the past several years.

"These banks will put billions of dollars towards relief for families across the nation. They'll provide refinancing for borrowers that are stuck in high interest-rate mortgages," Obama said. "They'll reduce loans for families who owe more on their homes than they're worth. And they will deliver some measure of justice for families that have already been victims of abusive practices."

12 News reporter Melissa Blasius contributed to this article.

by Catherine Reagor - Feb. 9, 2012 09:28 AM The Republic |

Arizona gets $1.6 billion in mortgage fraud settlement

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