Millions of people could have mortgage debt cut as America's top lenders agree deal over alleged abuses in housing market
US government officials have reached a $25bn settlement with the country's largest lenders over alleged abuses in the housing market. The agreement, announced by attorney-general Eric Holder, is the largest industry fine since a multi-state deal with the tobacco industry in 1998.
"This agreement reflects our commitment – at both the federal and state levels – to ensure justice, and to recover losses, for victims of reckless and abusive mortgage practices," said Holder.
Federal and bank officials have been in negotiations over the deal for over a year. There had been speculation that president Barack Obama might announce the deal at his State of the Union speech in January.
But talks stalled as California and New York balked at the terms of the agreement. They have now signed off on the deal, which covers 49 states.
The agreement covers five banks: Ally Financial, Bank of America, Citigroup, JP Morgan Chase and Wells Fargo. The five account for 55% of all outstanding home loans, according to Inside Mortgage Finance. It does not cover Fannie Mae and Freddie Mac, the government-sponsored lender that account for most of the rest of the market.
One in five American homeowners now owe more on their mortgages than their homes are worth – a situation termed negative equity.
The deal will represent the broadest effort yet to help them. A million people could have their mortgage debt cut or their loans refinanced at lower rates.
Under the agreement, the banks are expected to be granted immunity from civil lawsuits brought by the attorney-generals over so-called "robo-signing" cases – where lenders rushed through paperwork in order to speed up foreclosures.
However, state officials in California and New York pushed hard to ensure that they will be allowed to pursue other mortgage-related claims, including suits involving the sale of the mortgage-backed securities whose collapsed triggered a global financial crisis.
Last week, New York attorney general Eric Schneiderman filed a suit against MERS – an electronic mortgage registry responsible for much of the robo-signing – Bank of America, JP Morgan and Wells Fargo. That case is expected to proceed despite the agreement.
Holder said: "Let me be clear on this. While today's agreement resolves certain civil claims based on mortgage loan servicing activities, it does not prevent state and federal authorities from pursuing criminal enforcement actions."
Holder also unveiled a website, nationalmortgagesettlement.com, that spells out details of the deal for homeowners.
New York has about 118,000 "underwater" borrowers whose homes are worth less than their mortgage. They would expect to share $136m as a guaranteed cash payment from the settlement.
California, with more than 2 million underwater borrowers, would get $430m, Florida would get $350m and Texas $141m.
George Goehl, executive director of non-profit National People's Action said the settlement was a step in the right direction but more needed to be done.
"What matters now is how do we make tens of millions of dollars in relief into hundreds of millions."
He said the total of negative equity owed by homeowners in the US was now believed to be more than $700bn, and that $26bn was a "drop in the bucket."