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Here’s What the Foreclosure Settlement May Look Like


So it’s looks as if they’re finally getting around to finalizing that huge compensation deal related to all those unlawful foreclosures.

Five of the nation’s biggest banks, including Ally Financial, Bank of America, Chase, Citi, and Wells Fargo, want to put the bad business behind them.

But the money will only go to those with private mortgages issued between 2008 and 2011, not those backed by Fannie Mae and Freddie Mac.

There’s another foreclosure review taking place for other mortgages, and to be honest, I can’t keep track of all the different settlements out there. I apologize…

Anyways, a draft of the proposed settlement has been sent to U.S. state attorneys general, outlining where the money may go.

Of course, this is still preliminary, and we won’t know the final details until it’s, well, final.

$25 Billion Up For Grabs

Under the deal, roughly $25 billion would be allocated to individual states, which would then cut checks to certain homeowners.

The biggest chunk of the money, $17 billion, would go toward principal reduction. So essentially those with underwater mortgages would be a little less underwater, perhaps.

Unfortunately, only about one million “lucky” homeowners would receive roughly $20,000 each in principal reduction.

This may be enough to get some homeowners in some regions of the nation back above water, but in states like California, where the average negative home equity was $200,000 on foreclosed properties, it’ll mean little if nothing.

This also illustrates the significant cost in allocating principal reductions, which I argued weren’t the right move given the associated cost and how far along we are in the mortgage crisis.

Put simply, minimal principal reduction probably won’t sway a homeowner who has stuck around this long. If they’re still making monthly mortgage payments, it may be better to reduce their rate, not their balance owed by some trivial amount.

Another $5 billion would be placed in a reserve account for “various state and federal programs,” whatever those might be.

$1,800 Checks to 750,000 Homeowners

Included in this figure would be $1,800 checks sent to about 750,000 homeowners who were adversely affected by deceptive foreclosure practices.

It’s unclear if homeowners who already lost their homes to foreclosure will be included. If so, it’ll be a pretty bittersweet gesture.

Finally, the remaining $3 billion or so would go to help homeowners refinance their mortgages at an interest rate of 5.25%.

Again, not sure why they chose 5.25% as the mortgage rate of choice here, given the fact that mortgage rates on the popular 30-year fixed are now below 4%.

Seems a bit odd that they would offer to refinance mortgages at above market rates, but I’m sure there’s some reason behind that.

So that’s all we know about the foreclosure settlement at the moment – perhaps we’ll hear more tonight when President Obama delivers his State of the Union address.

Regardless, this doesn’t appear to be much of a game changer.

More interesting will be any reference to the supposed mass mortgage refinancing plan, which would give all those with Fannie/Freddie backed mortgages the option to refinance to a rate of 4% or less.

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