Who are the Biggest Beneficiaries of the $25 Billion Nationwide Mortgage Settlement?

Homeowners deeply underwater on their mortgages can look forward to some help from a $25 billion nationwide settlement over alleged foreclosure abuses. According to details of the settlement filed Monday in U.S. District Court in Washinton, the nation’s largest mortgage servicers have been given incentives to help those who owe 40 percent to 75 percent more than the value of their homes.

Many details of the settlement with Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), Citigroup (NYSE:C), and Ally Financial (NYSE:ALLY-B) were not available until the paperwork was submitted to court on Monday. Not it seems banks will get more than six times the credit for reducing loans for severely underwater borrowers than they would for helping those who owe 5 percent to 15 percent more than the value of their homes.

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The settlement is expected to be approved by a federal judge, putting an end to investigations by the Justice Department, the Housing and Urban Development Department, and attorneys general in 49 states into botched foreclosure paperwork and mortgage servicing problems, at least at the five banks involved in the settlement.

California Attorney General Kamala Harris estimated that the settlement would provide $18 billion in benefits just to Californians, including $8.9 billion in principal write-downs for 250,000 troubled homeowners in the nation’s most populous state. She also expects $3.5 billion in forgiveness of missed mortgage payments and penalties for 32,000 borrowers in her state, and $3.1 billion in forgiven debt to 23,000 borrowers who will be allowed to sell their homes for less than the mortgage amount.

However, despite the obvious benefits for individual homeowners, the settlement’s effect on the housing market as a whole may be rather limited. Only customers of the five servicers involved in the settlement are eligible for principal reductions, and only if their loan is not owned or backed by government-controlled mortgage financing firms Fannie Mae and Freddie Mac. Those and other limitations mean fewer than 5 percent of the nation’s 11.1 million underwater homeowners will be eligible.

The settlement also focuses more on assisting struggling homeowners than compensating people who already lost their homes through foreclosure. Banks will pay a combined $1.5 billion to people who lost their homes in faulty foreclosures between 2008 and 2011. About 750,000 homeowners will receive about $1,500 to $2,000 each. About $20 billion of the settlement will be used to assist homeowners, with $17 billion going toward principal deductions and the other $3 billion toward refinancing.

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com