State to share in $25B settlement
Michigan one of 49 states to sign on to compensate for ‘abusive practices’
POSTED: 11:02 PM Friday, February 17, 2012
BY: Carol Lundberg
Michigan will share in a settlement said to be worth $25 billion, but it’s not exactly raining cash on Michigan’s foreclosure problem.
Michigan joined 48 other states in a $25 billion settlement with the country’s five largest mortgage lenders.
The settlement, intended to hold mortgage servicers accountable for what U.S. Attorney General Eric Holder said were “abusive practices,” will provide some relief to homeowners struggling to pay mortgages that are more than their houses are worth.
But the amount of relief is so small, too small to stabilize the country’s still-crippled housing market, said Matthew Heron of Clark Hill PLC in Detroit.
“If you think about it, how could it really solve the problem of $700 billion worth of underwater mortgages?” he asked. “The reason the housing market isn’t recovering yet is a function of the economy, of the free market.”
Heron represents lenders. Though the settlement doesn’t cover the damage to state budgets and individual borrowers as a result of the foreclosure crisis, it does give states’ attorneys general a little bit of resolution without requiring them to invest a lot of resources in investigations.
“The investigations by the attorney generals haven’t resulted in significant settlements, and they do put a burden on the states, which are having economic problems,” Heron said.
But the states and borrowers certainly aren’t going to receive $25 billion worth of relief.
Of the $25 billion, the banks — Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and GMAC/Ally — are paying about $5 billion in cash to federal and state governments, or approximately 1 percent of their combined market capitalization.
Of that, $1.5 billion will be used to establish a Borrower Payment Fund to provide payments to borrowers who lost their homes to foreclosure, according to Michigan Attorney General Bill Schuette. The payments will be as much as $2,000, though details have not yet been worked out.
The payments to state and federal governments will be used to repay public funds lost as a result of servicer misconduct, and to fund programs such as legal aid and housing counseling that the states are providing. The settlement excludes borrowers with Fannie Mae and Freddie Mac mortgages, who make up approximately half of the homeowners in the U.S.
Schuette said in a press release that Michigan residents will receive approximately $500 million dollars, but the only hard cash flowing into Michigan will be $101 million, which will be paid mainly to the State of Michigan. (See “Settlement details,” right.)
That payment is not meant to make up for a foreclosure,” said attorney general spokesman John Selleck. “It’s a punishment for poor customer service by the banks. We were getting calls from people who would be on the phone with a mortgage servicer trying to get some kind of help with their payments, at the same time that the bank was foreclosing on them.”
He said that when the housing market crashed in 2008, it crashed very hard and very fast.
“The banks just didn’t handle their customers the way they should,” Selleck said. “The settlement is to address two main thrusts — horrendous customer service by the banks, and robosigning, which we are still criminally pursuing.”
Michigan has been particularly hard-hit by the foreclosure crisis. Last year, a California-based analytics firm, CoreLogic, reported that 35 percent of Michigan homeowners are underwater in their mortgages.
The deal does nothing to solve the problems in the housing market, which will continue to be a drag on the economy because small business owners aren’t able to create jobs when they have no equity in their real estate, said Kenneth Gross of Thav Gross PC in Bingham Farms. Gross represents borrowers.
What would help borrowers the most, he said, is principal reductions, something the banks have been reluctant to do.
“This settlement doesn’t address any of that. It’s extremely limited to the issues of robo-signing and fraudulent foreclosures,” Gross said.
“Basically what’s going to happen is everyone in the world going to call my office wondering how to get their $2,000,” Gross said. “But no one knows yet who will be eligible to receive what. There have been 1.9 million foreclosures with another 1.9 million still to come.”
The settlements will not prevent individual borrowers from suing their lenders if they have a cause of action, Heron noted.
“What this does do is to free up the attorney generals and their resources to decide what they want to dedicate their time to,” Heron said. “The public settlement funds are being used to prop up the services the states would have a hard time providing.”
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