WASHINGTON – Federal officials announced Thursday that 49 states have accepted a $25 billion foreclosure-abuse settlement with the five largest mortgage lenders -- a deal that primarily helps underwater homeowners but pays just $2,000 to those already wrongly foreclosed upon.
The bulk of the deal requires the banks to reduce some loans and refinance mortgages for underwater borrowers. Oklahoma was the lone holdout to the agreement.
President Obama described the deal as a "landmark settlement" that would "begin to turn the page on an era of recklessness" while speeding relief to hard-hit homeowners.
It is the biggest settlement involving a single industry since a 1998 multistate tobacco deal. Under the agreement, five major banks -- Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial -- will reduce loans for nearly 1 million households.
Those who lost their homes to foreclosure are unlikely to get their homes back or benefit much financially from the settlement. For those improperly foreclosed upon, the banks will cough up checks of $2,000 to about 750,000 Americans. The banks will have three years to fulfill the terms of the deal.
Some critics say the proposed deal doesn't go far enough. They have argued for a thorough investigation of potentially illegal foreclosure practices before a settlement is hammered out.
But the deal was geared more toward homeowners who are struggling to make payments now, yet still have possession of their homes. The agreement requires the banks to commit a staggering amount of money toward changing loan terms. At least $10 billion will go toward reducing the principal for borrowers who are delinquent or underwater borrowers at risk of default. At least $3 billion will go toward refinancing. Other payments will go toward state governments, and the federal government, to "repay public funds lost as a result of servicer misconduct," according to the Justice Department.
Obama, noting the damage the housing bubble did to the broader U.S. economy, said no single action would heal the housing market. But he described the settlement as an important step, one which would address alleged abuses by mortgage lenders -- like using fake signatures in the foreclosure process.
"These practices were plainly irresponsible, and we refused to let them go unanswered," Obama said.
All but one of the 50 states agreed to the deal. Oklahoma, the lone holdout, will receive no money. That state's attorney general had opposed the massive fine included in the settlement, and reportedly was concerned the penalty went beyond the scope of the original investigation.
Attorney General Eric Holder said the deal would "hold mortgage servicers accountable for abusive practices."
The conditions will be overseen by Joseph A. Smith Jr., North Carolina's banking commissioner. Lenders that violate the deal could face $1 million penalties per violation and up to $5 million for repeat violators.
During the financial and housing crisis, home values sank and millions edged toward foreclosure. Many companies processed foreclosures without verifying documents. Some employees signed papers they hadn't read or used fake signatures to speed foreclosures -- an action known as robo-signing.
Under the deal, the 49 states have said they won't pursue civil charges related to these types of abuses. Homeowners can still sue lenders in civil court on their own, and federal and state authorities can pursue criminal charges.
Bank of America will pay the most to borrowers as part of the deal -- nearly $8.6 billion. Wells Fargo will pay about $4.3 billion, JPMorgan Chase will pay roughly $4.2 billion, Citigroup will pay about $1.8 billion and Ally Financial will pay $200 million. This does not include $5.5 billion in federal and state payments.
The deal also ends a separate investigation into Bank of America and Countrywide for inflating appraisals of loans from 2003 through most of 2009. Bank of America acquired Countrywide in 2008.
The banks and U.S. state attorneys general agreed to the deal late Wednesday after 16 months of contentious negotiations.
New York and California came on board late Wednesday. California has more than 2 million "underwater" borrowers, whose homes are worth less than their mortgages. New York has some 118,000 homeowners who are underwater.
In addition to the payments and mortgage write-downs, the deal promises to reshape long-standing mortgage lending guidelines. It will make it easier for those at risk of foreclosure to make their payments and keep their homes.
The settlement would apply only to privately held mortgages issued from 2008 through 2011. Banks own about half of all U.S. mortgages -- roughly 30 million loans.
The Associated Press contributed to this report.