National Mortgage Settlement: What You Need to Know

Recently there has been some interesting (and somewhat confusing) news about mortgages and some reductions and pay-outs to some hurt by the recent housing crisis – yes, I do consider this a crisis because nearly 8 million Americans have faced foreclosure since the housing bubble burst.  I wanted to use this post to try and explain what this means as clearly as possible.

On February 9th, the U.S Justice Department announced a $25 billion national mortgage settlement deal between the top five mortgage-lending banks (Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial) and 49 states (Oklahoma residents will not be eligible because officials from that state did not join this settlement).

Why is this happening now?

National Mortgage Settlement

Photo © by 401K

Basically because of practices that these banks have used when writing mortgages.  Those practices include the “robo-signing” of documents without proper verification and the “dual track” process of negotiating a loan modification with homeowners while simultaneously pursuing a foreclosure.   The $25 billion will be used in a combination of cash payouts to consumers and credits to banks that help people keep their homes by arranging more affordable payment terms.  This settlement will provide some relief for homeowners in danger of losing their homes and it will also make it easier for current borrowers to refinance. The deal also seeks to reform mortgage-lending practices, minimizing the chances that these foreclosure problems will happen again.

Here are some questions about this settlement that some might have:

Who will this deal help?

There are three groups who will benefit: homeowners who need loan modifications to remain in their homes, homeowners who are current on their mortgage payments but still owe more than the value of their home and borrowers who have lost their house due to foreclosure. The first two groups will get help refinancing at current interest rates (which can be much lower for many depending on when they originally bought their house), while the third group will get cash payments.  Around $1.5 billion will be given to some 750,000 borrowers who have lost their homes.  This works out to about $2,000 per person.

Who doesn’t benefit from this settlement?

This deal does not cover mortgages held by Fannie Mae or Freddie Mac, which account for 70 percent of mortgages in the United States.

Is there any help available for Fannie and Freddie borrowers?

Yes – the HARP and HAMP programs. HARP helps Fannie and Freddie borrowers who are underwater on their loans (owe more than the value of their house) refinance under current rates. HAMP helps these same borrowers lower their monthly mortgage payments to 31 percent of their monthly pre-tax income. These two programs can provide savings of up to a few hundred dollars a month depending on the loan.

How do I know if this new settlement will help me?

In the next couple of months, an administrator will be chosen to oversee the settlement.  After this time, eligible homeowners will be identified and notified over mail.

I know that there are some that agree with the purpose of this settlement and others that are completely against it.  In my next post, I will look at it from both of these points of view.

About Danny Kofke

Danny Kofke is currently a special education teacher and author of “How To Survive (and perhaps thrive) On A Teacher’s Salary.” His frugality has enabled him to pursue a job he is passionate about and, at the same time, support a family of four on his salary alone.

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