The financial entities involved are: Ally Financial (formerly GMAC), Bank of America, Citigroup, JP Morgan Chase, and Wells Fargo. The agreements are highly detailed and complex, as evidenced by the fact that they are more than 300 pages each. Although the settlement agreements were signed earlier this year, the full details and the mechanisms the banks must adopt to compensate their mortgage borrowers are just beginning to emerge.
This settlement is historic in the sense that it is the highest sum obtained from private enterprises by a joint state and federal effort. For the homeowners who were wrongly foreclosed upon and evicted from their properties, the settlement brings some relief.
Some of the details have already been revealed in press releases issued by some of the banks. For example, Bank of America is estimating that around 200,000 homeowners who are underwater -meaning that the balance of their mortgage exceeds their home value- may see principal write-downs of about $100,000. New details include a concession in which the banks will not have to take a 100 percent loss on home equity lines of credit. Such second liens can be written down along with the principal mortgage or senior lien.
Not all borrowers who are upside down and underwater on their mortgages will be able to get write-down relief. A thorny issue related to the settlement agreement is the unwillingness of Fannie Mae and Freddie Mac to participate in the principal reduction scheme. According to recent comments made by Edward J. DeMarco, acting director of the government agency overlooking the conservatorship of Fannie and Freddie, mortgage loans that have been guaranteed and purchased by the federal government do not qualify for principal write-downs.
The filing by the Department of Justice is seen by economy analysts as good news for the American recovery. The high number of underwater mortgages in the United States deeply affects the balance sheets of lenders and investment banks, and homeowners can now breathe easier knowing that the terms of their mortgages will be alleviated.
