The “Robo Settlement” — What’s in the Details?

Who Wins and Who Loses in the $26 Billion Deal

The $26 billion dollar settlement announced earlier this month the Department of Justice and and Attorneys General from every state with the exception of Oklahoma is being hailed a significant victory for consumers and a step forward for the housing market.

Major Lenders Involved in the Settlement

There are five major banks involved in the settlement: Wells Fargo Mortgage, Bank of America, JP Morgan Chase, Ally Financial and Citigroup. These five are responsible for the entire $26 billion, though an as-yet-unnamed additional nine other, smaller, lenders can contribute around another $7 billion to the settlement if they choose.

How Much the Banks Are Really Shelling Out

The reality of the settlement is that the five lenders are directly responsible for paying $5 billion in cash to be allocated to the Feds and the 49 participating states. Another $500 million to $1 billion will be paid by Bank Of America Mortgage to settle claims against its subsidiary, Countrywide — $500 million payable immediately and another $500 million to be paid over three years if certain loan forgiveness targets are not met.

Who’s Paying the Balance

Of the remaining $20 billion, $3 billion will be provided by the banks in the form of mortgage refinance loans for current borrowers. The largest portion of the settlement, $17 billion, will be funded by reducing the returns to investors who bought mortgage backed securities from the banks.

Who Stands to Benefit

Some existing homeowners, assuming their loans are not GSE or FHA-backed, with troubled mortgages might see their balance reduced by up to $20,000 — those principal reductions are expected to take $17 to $20 billion of the settlement. Another $3 to $5 billion is expected to be distributed as checks to around 750,000 former homeowners whose homes were foreclosed on between 2008 and 2011. Remaining funds will be directed toward refinance support and foreclosure preventions programs.

Breaking it Down

The $5 billion for customers who lost their homes due to improper foreclosure works out to about $2,000 per homeowner.  The banks, although they seem to have gotten away with a minimum penalty, did not win much if any legal protection as a result of the settlement — states and homeowners can still can after them individually, as can the Federal Government. With the current estimate of negative equity in the housing market hovering around $700 billion, $26 billion seems like barely a drop in the bucket.

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