Illinois Attorney General Lisa Madigan, along with U.S. Attorney General Eric Holder and other state Attorneys General, announced the $25 billion settlement of a investigation into widespread robosigning practices within the nation’s five largest mortgage servicers. Illinois will receive more than $1 billion to write down principal, help underwater homeowners refinance, and compensate homeowners who were harmed by robo-signing. We thank Attorney General Madigan and others across the country who worked hard to ensure that the settlement included much-needed principal reductions, as well as not including an overly broad release of liability for Bank of America, JPMorgan Chase, Wells Fargo, Citibank, and Ally Bank.
“While the settlement is not a panacea to end the troubles of struggling homeowners, this is a significant step in the right direction and a real victory for homeowners,” said Dory Rand, President of Woodstock Institute. “Now that we have won resources for effective relief, such as principal reductions, we must work to ensure that they are targeted to communities hardest hit by the foreclosure crisis.”
A key provision of the settlement is increased funding for principal reductions, which servicers have been largely reluctant to extend to homeowners. Negative equity has been shown to be a principal driver of foreclosure, and Illinoisans have lost billions of dollars in wealth due to plummeting home values. Approximately 400,000 homeowners in the Chicago region are underwater, with another 80,000 dangerously close to losing all of their equity. Woodstock estimates that the average underwater borrower in the Chicago region owes about $61,000 more than the value of their home. While $1 billion in relief will not suffice to restore all of homeowners’ lost wealth, it can potentially turn back the tides of default in hard-hit communities, stop properties from becoming vacant, and restore confidence in the housing market.
Servicers also agreed to a set of standards that would vastly improve their loan servicing operations. Importantly, servicers agreed to put the brakes on the dual track of simultaneously pursuing both a loan modification and a foreclosure on the same home. Under the settlement, servicers will be required to consider a borrower for a loan modification before initiating a foreclosure, increasing the chances of saving his or her home. Borrowers will also have the right to appeal a modification decision, which is crucial when servicers have been shown to have widespread problems with losing important documentation or incorrectly determining eligibility. These and other changes to servicing processes will significantly improve communications between borrowers and servicers and help more homes avoid foreclosure whenever possible.
Robosigning was just one of the harmful behaviors servicers engaged in that exacerbated the foreclosure crisis. Financial institutions also had issues with improperly securitizing loans and fair lending concerns.* These issues are not part of, or affected by, the settlement. This settlement does not release banks from investigations into these behaviors, nor from criminal offenses. Homeowners and investors can still bring cases against the banks, either individually or as part of a class action suit. We applaud the settlement negotiators for listening to consumers’ concerns and making sure that the agreement was narrowly crafted to settle only concerns related to robosigning.
“We still have a long way to go to stabilize communities, but this settlement makes real advances towards that goal,” says Rand. “The settlement sets an important precedent that emphasizes the importance of widespread principal reductions. We hope that this precedent will persuade Fannie Mae and Freddie Mac to overcome their ‘philosophical’ objections to principal reductions and offer substantive relief to homeowners.”
*This story was edited as new information about the settlement became available. Our statement originally said that the settlement would not release servicers from claims regarding loan origination practices, while the official settlement website indicates that these claims will indeed be released. The official settlement language has not been made public at this time.