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California Sees Huge Chunk of Servicer Settlement

State AGs, U.S. DOJ and HUD agree to settlement with servicers

Feb. 9, 2012

By Mortgage Daily staff

A multi-state settlement reached between the nation's biggest mortgage servicers, state attorneys general and federal agencies goes beyond the $25 billion that had been reported. A big share of the settlement is earmarked for California, which had been a stumbling block in final negotiations.

The settlement was announced in a press conference Wednesday that included state and federal officials. Agreeing to the deal were Bank of America Corp, JPMorgan Chase & Co., Wells Fargo & Co., Citibank and Ally Financial.

The five companies were ranked as the biggest mortgage servicers in 2011 by Mortgage Daily.

A series of consent judgments are expected to be filed later this month in U.S. District Court for the District of Columbia.

The settlement spans a three-year period.

"A final agreement can play an important role stabilizing and providing certainty and confidence to the housing and mortgage markets," Mortgage Bankers Association President and Chief Executive Officer David H. Stevens said in a statement. "With all the rumors and speculation surrounding these negotiations behind us, it is now imperative that policymakers, lenders, servicers and other stakeholders work together on policies and initiatives that will allow us to get the housing market on the road to recovery."

A statement from Iowa Attorney General Tom Miller, who led the state attorneys general in negotiations, indicated that direct homeowner relief is estimated at $32 billion, while another $3 billion will go to a refinance program for negative-equity borrowers and $5 billion will be paid to the government, including $4.25 billion to the states and $0.75 billion to the federal government.

The settlement includes a $25 billion penalty. Around $20 billion of the total settlement will be used to provide relief and assistance to struggling homeowners and neighborhoods.

The agreement also calls for borrowers to receive comprehensive new protections from new servicing and foreclosure standards. An independent monitor will be utilized to ensure compliance.

"This enforcement action targets one segment of the nation's vast and complex mortgage market, the held-for-investment market, which encompasses loans held by the banks for the foreseeable future or maturity," according to Miller, whose state is expected to see $40 million from the settlement. "The U.S. Department of Housing and Urban Development estimates that HFI mortgages comprise about 20 percent of the U.S. mortgage market."

Participating in the settlement were the Department of Housing and Urban Development, the Department of Justice and 49 state attorneys general.

The agreement only settles civil claims; states can still pursue criminal charges. In addition, the settlement doesn't prevent borrowers from bringing their own civil lawsuits.

"Extensive claims" tied to mortgage securitization activities, including the claims that will be the focus of the new Residential Mortgage-Backed Securities Working Group, are preserved in the agreement.

A statement from California Attorney General Kamala D. Harris indicated that in an effort to speed up criminal investigations and strengthen prosecution, the state will expand its 42-member Mortgage Fraud Strike Force that was launched in May 2011.

The government noted that the initial investigation into servicers' foreclosure activity was first launched by the U.S. Trustees Program, which serves as a watchdog over bankruptcy court operations. They reviewed 37,000 bankruptcy documents and performed discovery in more than 175 cases.

Investigations by HUD followed and uncovered "disturbing practices" such as borrowers being pushed into foreclosures without the servicers seeking alternatives first.

"In addition to addressing many of the most egregious mortgage loan servicing abuses that our investigations have uncovered, this agreement establishes significant new homeowner protections to help prevent future misconduct," a Justice Department statement said. "It also provides substantial financial assistance to victim borrowers.

"In fact, it is the largest joint federal-state civil settlement in history."

HUD Secretary Shaun Donovan announced that settlement details are available online at

California's Harris, who had been resisting the settlement because it didn't go far enough for borrowers in her state, finally signed on to the deal, which targets up to $18 billion for the Golden State -- including $3.9 billion for Los Angeles County and around $2.7 billion for the state's ailing Inland Empire.

"The agreement comes after California departed from the multi-state negotiations last September when the estimated relief to California was $4 billion," Harris said in a statement. "Attorney General Harris insisted on more relief for the most distressed homeowners, meaningful enforcement, and the ability of California and other states to pursue investigations into misconduct.

But in addition, Harris claims that California's participation in the settlement resulted in another $6 billion going to other states.

"As part of the separate California guarantee, banks must enact a minimum of $12 billion in principal reductions for California homeowners." California said. "Failure to achieve this minimum level of reductions will result in substantial cash payments of up to $800 million that the banks will have to pay to the state.

"Unlike the larger multi-state agreement, which is enforceable in a federal court in Washington, D.C., this payment provision empowers the attorney general to summon the banks to California state court."

The settlement with the states is in addition to consent orders between the nation's 14 biggest servicers and the Office of the Comptroller of the Currency executed in April 2011.

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