$20 billion in relief for homeowners

The federal government and 49 state attorneys general have settled a lawsuit for $25 billion against the country's five biggest banks for foreclosure processing and mortgage loan servicing problems. Problems with how these banks were handling foreclosures came to light almost 2 years ago, and the settlement calls for these lenders to provide financial relief to financially troubled homeowners.

The agreement is with the following five largest mortgage servicers: Bank of America Corporation, JPMorgan Chase & Co., Wells Fargo & Company, Citigroup Inc. and Ally Financial Inc. (formerly GMAC).

"This agreement – the largest joint federal-state settlement ever obtained – is the result of unprecedented coordination among enforcement agencies throughout the government," said U.S. Attorney General Eric Holder. "It holds mortgage servicers accountable for abusive practices and requires them to commit more than $20 billion towards financial relief for consumers. As a result, struggling homeowners throughout the country will benefit from reduced principals and refinancing of their loans. The agreement also requires substantial changes in how servicers do business, which will help to ensure the abuses of the past are not repeated."

Here are some details on the settlement:

Of the $25 billion settlement, the banks will dedicate $20 billion toward various forms of financial relief to borrowers (the settlement calls for the remaining $5 billion to go towards federal and state governments, 49 states are involved in the settlement including Maryland).

Of that amount, $10 billion will go toward reducing the principal on loans for borrowers who, as of the date of the settlement, are either delinquent or at imminent risk of default and owe more on their mortgages than their homes are worth.

At least $3 billion will go toward refinancing loans for borrowers who are current on their mortgages but who owe more on their mortgage than their homes are worth.

Up to $7 billion will go towards other forms of relief, including forbearance of principal for unemployed borrowers, anti-blight programs, short sales and transitional assistance.

The $5 billion portion of the settlement allocated to federal and state governments is split the following ways: $1.5 billion of this payment will be used to establish a Borrower Payment Fund to provide cash payments to borrowers whose homes were sold or taken in foreclosure between Jan. 1, 2008 and Dec. 31, 2011, and who meet other criteria. $3.5 billion will go to state and federal governments to be used to repay public funds lost as a result of servicer misconduct and to fund housing counselors, legal aid and other similar public programs determined by the state attorneys general. Furthermore, $1 billion of the $3.5 billion portion resolution of a separate investigation into fraudulent and wrongful conduct by Bank of America and various Countrywide entities related to the origination and underwriting of Federal Housing Administration (FHA)-insured mortgage loans, and systematic inflation of appraisal values concerning these loans, from Jan. 1, 2003 through April 30, 2009. Payment of $500 million of this $1 billion will be deferred to partially fund a loan modification program for Country-wide borrowers throughout the nation who are underwater on their mortgages.

The new servicing standards that will be put into place make foreclosure a last resort by requiring servicers to evaluate homeowners for other options first. In addition, banks will be restricted from foreclosing while the homeowner is being considered for a loan modification. The new standards also include procedures and timelines for reviewing loan modification applications and give homeowners the right to appeal denials. The banks will also be required to create a single point of contact for borrowers seeking information about their loans and maintain adequate staff to handle calls.

The agreement will be filed as a consent judgment in the U.S. District Court for the District of Columbia. Compliance with the agreement will be overseen by an independent monitor, who will oversee implementation of the servicing standards required by the agreement; impose penalties of up to $1 million per violation (or up to $5 million for certain repeat violations); and publish regular public reports that identify any quarter in which a servicer fell short of the standards imposed in the settlement.

Lauren Bunting is a Broker with Keller Williams Realty of Delmarva in Ocean City, Maryland.