Eligibility limits will dilute impact of foreclosure settlement

Although the unprecedented $25 billion mortgage-fraud settlement is a step toward holding the mortgage-loan industry more accountable, it doesn’t come close to repairing the damage that homeowners suffered at the hands of fraudulent mortgage servicers in recent years, consumer advocates tell Consumers Digest.

The terms of the settlement that federal and state regulators forged Feb. 9 with five of the nation’s largest banks likely will reduce egregious practices such as phony foreclosure signatures, and it sets aside nearly $20 billion for mortgage-relief efforts, including reduction of mortgage principals for some homeowners. But plenty of reasons exist why the settlement doesn’t go far enough for consumers, experts say.

For starters, the settlement affects only the underwater mortgages and foreclosures that are related to the banks that agreed to the settlement. Those banks are Ally Financial, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo. In the context of the housing crisis, being underwater means that you owe more on the mortgage than the current value of your home.

Homeowners who are eligible to receive principal reductions could notice a significant difference in their balance, but there are too many variables at play to determine how these reductions will affect the average homeowner, says Ira Rheingold, who is executive director of National Association of Consumer Advocates. For instance, Rheingold says a homeowner who owes $200,000 on a mortgage, but whose home is valued at $100,000 likely could see a principal reduction of as much as $80,000. Although that sounds impressive, it still would leave the homeowner with a $120,000 balance and a mortgage that still is underwater.

Another major flaw in the settlement is that if federal lending programs Fannie Mae or Freddie Mac originated your underwater mortgage, you won’t qualify for any relief because Fannie Mae and Freddie Mac aren’t part of the settlement. Even if your mortgage that originated from Fannie Mae or Freddie Mac is being serviced by one of the five banks that are in the settlement, you still are out of luck.

About 27 percent of the 11 million underwater mortgages in the United States originated with Fannie Mae and Freddie Mac, according to ProPublica. And the experts whom we interviewed say homeowners won’t see real relief until the federal government also forces Fannie Mae and Freddie Mac to reduce loan balances.

A lot of people “think they might be eligible, but [the banks] only service their mortgage, [and] that is going to be frustrating for a lot of people,” says Gordon Whitman of PICO National Network, which is a consumer advocacy group.

The settlement also sets aside $1.5 billion for foreclosure reparations. Rheingold says the former homeowners who qualify likely will receive from $1,500 and $2,000 depending on how many individuals apply for the money. But he says it could be at least 1 month before individuals may apply. Further, Whitman says $2,000 isn’t enough compensation. If you lost your home to foreclosure because of fraud that was committed by deep-pocket mortgage servicers, it seems only fair that you should get more money, he says.

– K. Fanuko