In the past two days there have been two huge settlements between some of the nation’s largest lenders and the government. These two separate settlements hope to address both the needs of homeowners who were subjected to foreclosure abuses, and also to help ameliorate the damage done by bad home loans sold to Fannie Mae. Both of these issues were a large part of the housing bubble that precipitated the financial crisis of 2008.
Bank of America Settles with Fannie Mae
Bank of America has agreed to a settlement with Fannie Mae for a total of $10.3 billion to address questionable home loans that were sold off during 2009 and 2010. Bank of America will pay out $3.55 billion directly to Fannie Mae as a part of the deal. An additional $6.75 billion will be paid to Fannie to repurchase 30,000 mortgages that are anticipated to produce losses. It is these bad home loans that led to the massive losses suffered by the mortgage guarantor and which culminated in Fannie Mae being taken over by the government and stimulated with a $116 billion bailout in order to keep it functioning.
These loans were originated by Countrywide Financial between 2000 and 2008. In 2008, Bank of America purchased Countrywide for $4 billion and assumed ownership of these bad loans, which they later sold to Fannie Mae. As a condition of the settlement, the $6.75 billion that Fannie Mae receives will go to the US government as the mortgage company is currently barred from keeping any profits.
Ten Banks Reach “Independent Foreclosure Review” Settlement
In an unrelated settlement, ten of the nation’s banks have agreed to an $8.3 billion dollar settlement in order to settle claims of foreclosure abuses. This settlement includes direct cash payments to borrowers and an additional $5.2 billion that will be used for other types of housing assistance, such as loan modifications and forgiveness of deficiency judgments.
This is a distinct and different settlement from the $26 billion foreclosure settlement of 2012. This settlement comes in response to a 2011 action by the Federal Reserve and the Office of the Comptroller of the Currency against 14 different banks. This action required these banks to hire independent consultants to investigate accusations of foreclosure abuse, and to provide compensation to the victims. That process, dubbed the “Independent Foreclosure Review,” has proven prohibitively expensive and has not produced results in a timely fashion.
Of the eligible 4.4 million borrowers, just 495,000 had applied to have their cases reviewed as of the end of 2012. As a result, federal regulators have said the review process will be replaced, “with a broader framework allowing eligible borrowers to receive compensation significantly more quickly.”
This means that the independent reviews at the 10 banks involved in Monday’s deal will conclude and the roughly 3.8 million borrowers whose homes were in foreclosure in 2009 and 2010 will receive cash compensation. Struggling borrowers whose mortgages are still serviced by one of these ten banks will receive help from the remaining $5.2 billion that is a non-cash payment. That money will be used to assist borrowers through benefits such as loan modifications and possible forgiveness of deficiencies.