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Governments Negotiating Mortgage Relief for Homeowners with Five Major Banks

Ever since the real estate bubble burst in 2006, the U.S. has been in the midst of a foreclosure crisis. In December 2008, the Case-Schiller Home Price Index recorded its most significant drop in its history and the market still has not recovered.

One in 605 housing units nationwide received a mortgage foreclosure notice in September 2011, according to RealtyTrac. In Texas alone, RealtyTrac reported one in every 985 housing units received a foreclosure notice in September 2011.

Now, the federal and state governments are in talks with five major banks to negotiate a deal that could bring relief to homeowners who are behind in their payments or underwater in their mortgages.

Details of the Mortgage Relief Plan

Various federal agencies, several states attorneys general and five major banks - Citigroup, J.P.Morgan Chase, Wells Fargo, Bank of America and Ally Financial - are discussing a settlement that would require the five banks to contribute at least $15 billion to reducing the principals of mortgage holders. The details of the plan have not been finalized, but under one version of the settlement plan, lenders would be required to meet dollar targets for reducing principals.

The plan is part of a larger $25 billion penalty for these lenders' actions in the "robo-signing" foreclosure scandal, during which lenders were foreclosing on mortgages without proper documentation that they owned the debt, and not properly reviewing the foreclosure documents they filed with the court.

Limited Impact

The $15 billion will only help a small number of the over 11 million homeowners in the U.S. who owe more on their mortgages than what their houses are worth. However, many of the attorneys general involved in the negotiations hope that this will serve as a pilot program, showing other lenders that principal reduction is an economical alternative to the expensive foreclosure process.

Some economists say that in order for the housing market and the economy overall to recover, lenders need to engage in large-scale principal reduction. They argue that the measure is extreme but necessary.

Resistance to the Plan

Federally-controlled mortgage lenders Freddie Mac and Fannie Mae, owners of about half of the mortgages in the U.S., have been resistant to the idea of reducing the principal of homeowners' mortgages. Leaders of those lending institutions believe that it would actually encourage people to stop paying their mortgages, in order to qualify for a reduction. Additionally, according to lenders, reducing the principal decreases the value of the assets that the companies hold-ultimately harming taxpayers, since taxpayers support the companies.

If the settlement plan is successful, economists hope that it will encourage Freddie Mac and Fannie Mae to reduce principals on mortgages they own.

Source: Reuters, "Analysis: Mortgage Probe May Open New Path for Housing Relief," Aruna Viswanatha, Rick Rothacker, Oct. 28, 2011.

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