Several of the largest financial institutions in the country may agree to a settlement that could provide compensation to as many as a million homeowners for improper foreclosure proceedings. The announcement of the potential deal was made earlier this month by U.S. Housing and Urban Development Secretary Shaun Donovan.
Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co., Citigroup and Ally Financial Inc. have been in talks with federal officials and state attorneys general to distribute as much as $25 billion to the thousands of homeowners who have fallen victim to a practice known as robo-signing. Robo-signing occurs when the bank signs off on foreclosure documents without thoroughly reviewing the content for accuracy.
The settlement is not set in stone, and a number of recent events may derail the deal altogether. In addition, consumer advocates and attorneys argue that the settlement agreement is not proportional to the amount of damage the banks have caused homeowners.
“Some say, ‘Look how far we are going. At least we are doing something that would benefit those who were impacted by the banks’ actions,’” says Graig Zappia, a real estate lawyer at Tully Rinckey. “Others say the settlement is basically letting the banks off the hook.”
The practice of robo-signing isn’t new to the mortgage lender industry. But after the housing collapse in 2008 when many more homeowner’s accounts went into default, robo-signing became a much more common industry practice.
“There used to be just a handful of these incidents, primarily with firms in New York, California and Florida that dealt with high-risk loans and had a high rate of foreclosure,” Zappia says. “But as more people complained about the foreclosure process and this issue of robo-signing kept popping up at more court appearances, people realized it was becoming a bigger epidemic.”
Robo-signing is tantamount to lying to the court. By signing foreclosure documents, the firm handling the foreclosure is attesting to the court that the information contained therein is truthful and accurate. Banks began abusing this practice on such a wide scale that some bank employees allegedly signed off on as many as 10,000 documents in a month. Worse, most homeowners caught in the middle of these robo-signing cases did not have the money to hire foreclosure defense attorneys to challenge the proceedings.
“If the consumers doesn’t have proper representation and if the court doesn’t have a keen eye of what is going on, the homeowner could be signing away their house when there is a possible defense,” Zappia says.
Eventually, the problem became so rampant that it attracted the attention of attorneys general from around the country.
“It became such a problem that people started using the state’s ‘long arm of the law’ to hail banks in and figure out how to resolve this gigantic situation,” Zappia says.
Settling on a Settlement
The proposed resolution, the multi-billion dollar settlement, would supposedly help only a limited number of homeowners. Those who have mortgages owned by Freddie Mac or Fannie Mae would not be able to seek compensation. Additionally, the settlement will likely call for date ranges that will define who is and is not eligible for payment under the deal.
It’s also still not clear how officials will determine the amount of an individual’s payout. It is likely that banks and officials will agree upon a variety of classes that will be based on a consumer’s foreclosure situation. Whatever class a consumer fits into will dictate the amount of compensation.
If the settlement plan does go through, Zappia recommends homeowners contact a knowledgeable real estate lawyer to help them navigate the process.
“Don’t just necessarily take an offer without getting some advice,” Zappia says. “Reach out to an attorney because there is so much going on that people are easily confused.”
Not Quite a Done Deal
But the settlement agreement still has quite a few hurdles to pass until it becomes official. And one of the biggest hurdles comes from objectors who say the deal is just a slap on the wrist for an industry practice that may have led to thousands of people wrongly losing their homes.
“There’s the question of whether this settlement would completely release these banks from future liability,” Zappia says. “What if something comes up down the road? If someone didn’t take advantage of this offer, they may be out of luck.”
This is precisely the concern of certain states’ attorneys general, including New York’s Eric Schniederman, who is worried about the broad protections the settlement may grant the banks for their wrongdoing. He would rather first take the time to further investigate the actions of the financial institutions to see what other practices and policies for which they may be held accountable.
There’s also questions about how much the settlement may actually do to relieve the victims of the banks’ practices.
“Many of these homeowners that were in crisis that have now had the opportunity to refinance will still have higher rates,” Zappia says. “We won’t know the affects of how successful the settlement was until two years down the line when we find out who took advantage of it and how it helped them stay in their homes.”
Finally, President Barak Obama’s plan to set up a new financial crimes unit to investigate the banks’ mortgage practices, which he announced during his Jan. 24 State of the Union address, may derail the agreement altogether. According to a statement JPMorgan CEO Jamie Dimon made in a recent interview, the formation of the task force would have a “pretty good chance” of nixing the deal.