Arizonans will divide up about $1.6 billion from a nationwide settlement announced Thursday with five major mortgage lenders.
The cash is part of a $26 billion pact to settle claims that the lenders acted improperly and illegally in dealing with homeowners who sought mortgage relief. The allegations range from refusing to work in good faith with borrowers to outright fraud in offering up documents to courts to foreclose on homes.
Thursday’s settlement came after California and New York finally agreed to become part of the settlement. That left only Oklahoma to deal on its own with the lenders.
But it also was waiting on Arizona Attorney General Tom Horne finally settling a separate lawsuit the state had filed in 2010 against Bank of America alleging various types of fraud.
Horne said Thursday that had to come first, as the national pact absolves the five lenders of any future civil liability. More to the point, if Arizona had signed the national deal first, it would have forfeited any chance of a separate recovery.
As it is, Bank of America has agreed to pay the state another $10 million.
Some of that will go to individuals who were harmed by the bank’s foreclosure activities. And some of that will go to efforts by Horne’s office to prosecute financial fraud.
The biggest chunk of Arizona’s share of the settlement is earmarked to directly help those who are “underwater” with their mortgages, owing more than the property is worth.
Horne said most of that piece has to be used to reduce the principal owed. But he said that does not mean homeowners will find their mortgages reset to current property values and that, even after the help, the outstanding balance may still be more than the home would bring in a sale.
He also could not spell out exactly how much help any one borrower would get, saying each lender will have to set its own standards. That means the banks could do a large number of small-amount reductions or a smaller number of bigger write-downs.
To qualify, though, homeowners have to be current on their mortgages. Horne said it would be irresponsible to reward those who have fallen behind.
“The mere fact that you’re underwater doesn’t mean you shouldn’t continue to make your payments,” he said.
And the funds are specifically set aside for those whose “loan-to-value” ratio is 175 percent, meaning that the amount owed is equal to 1.75 times what the house is worth.
But some of that $1.3 billion also is available for other types of relief.
For example, it could be used to facilitate a “short sale,” allowing the home to be sold when the mortgage balance exceeds the value of the property without ruining the credit rating of the borrower.
Other options include:
• Allowing homeowners who have lost their jobs to skip payments until reemployed.
• Relocation assistance for homeowners facing foreclosure.
• Funding to fix up blighted properties.
The deal also includes another $110 million for those who lost their homes in foreclosure between 2008 and the end of 2011 due to lender misconduct. Horne said he does not know how many are affected but believes the cash payments should work out to about $2,000 apiece.
Horne said that to qualify a former homeowner must allege that they were dealt with unfairly by the lender.
“They won’t have to prove it, but check off a box that they feel they were subject to (loan) servicer abuse,” he said.
Some of the allegations against the banks relate to what Horne said were horror stories of lenders who were double dealing with borrowers.
Horne said one of the biggest problems was when bank officials put borrowers on “trial modifications,” telling them to keep paying, even if it is not the full amount due.
“They abided by everything, they made their (reduced) payments on time, they have done everything they’re supposed to do,” he said. “And then they come home and find there’s a notice they’re being foreclosed on.
In fact, the state’s original lawsuit against Bank of America cited an instance where a homeowner was told to make a payment even after the bank had actually foreclosed on the house but had not yet evicted the owner.
One non-cash provision in the deal requires the lenders to have a single point of contact, one person who has all the information so this kind of thing does not happen. Another has time deadlines for when people need to be told whether their requests for loan modification have been approved or rejected.
There also is $85 million available for interest rate reductions – but not for everyone.
To qualify, a homeowner must have a mortgage with an interest rate of at least 5.25 percent. And here, like the principal reduction relief, nothing in the settlement spells out how low that rate has to go.
But Horne said there are incentives for the lenders to move the rate down low enough so the monthly payment drops by at least $100.
The biggest limit may simply be that the deal only affects those who have mortgages from the five companies: Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial, formerly known as GMAC. Those with mortgages held by others, including Fannie Mae and Freddie Mac, will not share in the settlement.
Horne said he believes the settlement is a good deal.
On the larger level, he said that $26 billion figure – the largest nationwide deal since states settled with tobacco companies decades ago – is “real money.” But he also said it is good for Arizona.
As crafted, Arizona is getting the third largest chunk of the $26 billion settlement, after only California and Florida.
Horne said that is far better than any deal on a population basis. But he said the figure is justified.
“Arizona has suffered more than other states in its mortgage market,” he said.
Anyway, he said there were risks in not joining the national deal.
“A decision to not settle would be based on the assumption that if we litigated, we would recover more,” Horne said.
“But even if we did recover more, there might be a four- or five-year delay while the case is litigated and then appealed,” he continued. “And you have a lot of homeowners who don’t want to get kicked out of their homes who would suffer during those four or five years.”
Potentially riskier is that, after all that time, the state might ultimately get a verdict for less than the $1.3 billion it is getting. “And that would be a terrible result.”