Some of the largest U.S. banks have agreed to an $8.5 billion settlement to resolve claims that they abused financially troubled homeowners as they sought to foreclose on their home purchase loans at the height of the country’s financial downturn.
As millions of U.S. homeowners lost their jobs in 2009 and 2010, they often fell behind on their monthly loan payments, prompting their lenders to take ownership of their properties. But as they moved to foreclose, banks often took shortcuts, automatically signing off on documents, even as they falsely claimed they had individually reviewed each homeowner’s loan.
Ten banks agreed to the settlement Monday with the country’s central bank, the Federal Reserve, and U.S. financial regulators at the Office of the Comptroller of the Currency. Among them are such well-known institutions as Bank of America, Citibank, JPMorgan, Chase, PNC and Wells Fargo. Regulators are still negotiating a settlement with four other financial institutions.
The regulators have said they found critical deficiencies and shortcomings in the way the banks handled the foreclosures.
For the first time, homeowners affected by the abuse will be compensated, with more than 3.8 million homeowners facing foreclosure in 2009 and 2010 getting payments ranging from hundreds of dollars up to $125,000.
Bank analyst Bert Ely said the affected homeowners fall into several groups of people, including those who still could keep their homes.
“There’s some people, a number of people that were forced into foreclosure that perhaps should not have been. At least there should have been more of an effort made to try and modify their mortgage to make it more affordable for the homeowner,” Ely said. “In some cases, the house has been resold and occupied by someone else, in which case there would be some type of financial compensation. In other circumstances, particularly if the bank still owns the house, then the homeowner might be able to get it back. But we also have a number of people, where the foreclosure has not yet taken place, and this settlement provides money to provide for reduction of mortgages to make them more affordable for the people that are still in their homes.”
Ely said the banks’ foreclosure practices ultimately do not speak well of their ethics. He said U.S. lending practices at the time stemmed from pressure by Wall Street on banks to approve as many loans as possible, so mortgage securities could then be sold to investors.
“I think, to some extent, they were, at least in some cases, meeting the supposed demand from Wall Street for mortgages to securitize,” Ely said. “I think this is all part of the widespread belief at the time that homeownership was good for all, and that the homeownership rate in the United States should be increased. And things went to excess, there’s no question about it. That’s on the origination side, or creation of mortgages. And then, of course, where a lot of problems arose was on mortgages that went bad, as many of them inevitably were, and then we got into the foreclosure mess. This settlement, and some other settlements, are dealing with the foreclosure problems that developed, where, again, a lot of shortcuts were taken.”
Ely said that as a result of excessive home loan lending, banks have changed their practices.