U.S., big banks reach $26B mortgage settlement

February 09, 2012 08:30AM

Government authorities and five of the biggest U.S. banks have agreed to a $26 billion settlement for wrongful mortgage servicing practices, the New York Times reported, and holdout attorneys general Eric Schneiderman of New York and Kamala Harris of California appear finally to be on board.

The $26 billion will be used to provide relief to about 1.75 million Americans who were affected by the burst of the housing bubble. One million underwater homeowners will get their mortgage debt reduced or refinanced at better rates and another 750,000 people who have already lost their homes will get checks worth $2,000. About 46,000 New York State borrowers will benefit from the agreement.

While the final figure is jarring, it still pales in comparison to the nearly $700 billion worth of negative equity carried by the 20 percent of Americans who are underwater on their mortgages, the Times noted. The settlement promises about $20,000 worth of aid to one million of those homeowners, but the average underwater borrower owes about $50,000. Mortgages owned by Fannie Mae and Freddie Mac are not covered in the deal.

The settlement punishes the banks — Wells Fargo, Bank of America, Ally Financial, JPMorgan Chase and Citigroup — for using false or improper documents to foreclose on millions of homeowners, but leaves open the possibility that regulators could prosecute the banks for the assemblage of risky mortgage securities and other elements that led to the bubble. Officials can also pursue claims of criminal wrongdoing. [NYT]