A Light at the End of the Tunnel for Homeowners

This week marked a huge settlement in the mortgage industry totaling $25 billion dollars that will be paid by 5 top banks who participated in the mortgage crisis from 2009 through 2011 for privately owned mortgages. This is the biggest settlement since the tobacco deal in 1998.

The 5 banks include: Bank of America which will pay $8.6 billion, Wells Fargo will pay $4.3 billion, JPMorgan Chase will pay $4.2 billion, Citigroup will pay $1.8 billion and Ally Financial will pay $200 million.

Forty-nine states joined the settlement. Oklahoma created their own deal with the banks. The government will negotiate with 14 additional lenders to join the settlement. Seventy-five percent of the settlement money will go towards California and Florida homeowners who were hit the hardest during the mortgage crisis.

The settlement deal will reduce loans for some Americans who are upside down on their homes (owe more money than the home is worth). The deal will require banks to send checks for $2,000 to approximately 750,000 homeowners whose homes were illegally foreclosed from 2008 to 2011.

Approximately 11 million homeowners are upside down on their homes or at risk of foreclosure. The deal would help approximately 1 million of those through loan assistance. The banks will be required to provide $17 billion in principal reduction and loan modifications for delinquent borrowers who are facing foreclosure. The banks will also provide $3 billion to help borrowers who are current on their mortgage payments but unable to refinance because they owe more than their homes are worth.

The banks are also required to pay a combined total of $5.5 billion to state and federal governments. Bank of America will pay an additional $1 billion to resolve a separate investigation into fraudulent conduct by the bank and the Countrywide Financial unit it acquired in 2008. The Federal Reserve is imposing an additional $766.5 million in penalties on the banks as part of the settlement.

The banks have 3 years to fulfill the terms of the deal. Homeowners are still able to sue their mortgage lenders on their own. State and federal authorities can still pursue criminal charges against the banks.

The settlement releases the banks from civic government claims over improper foreclosures and mishandling of requests for loan modifications. The deal requires the banks to make foreclosure a last resort for homeowners and the banks cannot foreclose on a homeowner that is being considered for a mortgage loan modification. As part of the settlement banks must adhere to new servicing standards, including stricter oversight of foreclosure processing and provide a single-point-of-contact for borrowers.

If you have a mortgage with any of these banks now is a good time to request a refinance or do a loan modification. Take a look at your credit report and setup payment plans for old debt and pay off any small accounts to help increase your credit score and chances for approval.