N.J. Will Get $837.7 Million As Part Of Foreclosure Settlement

The Record ( — Thursday, February 9, 2012

The Record

New Jersey will receive an estimated $837 million as part of Thursday's $25 billion settlement among five giant banks and state and federal authorities on foreclosure abuses, raising hopes of financial relief for some homeowners who were evicted or are facing foreclosure.

The settlement money will be used to lower loan amounts and allow refinancing for some homeowners who owe more on their mortgages than their homes are worth — a group that numbers 300,000 in New Jersey. It will also pay $2,000 to foreclosed homeowners hurt by so-called robo-signing, in which servicers' representatives signed legal documents without verifying them. Working out the details of who will get aid is expected to take six to nine months.

The settlement also spells out rules for how banks must treat homeowners in distress, including a requirement that the banks not foreclose on homeowners who are trying to work out a loan modification.

While the settlement was hailed by President Obama and state officials, critics complained that it will only help a small portion of homeowners who are in distress, and will have little positive effect on the housing market. And it remains unclear whether the settlement will trigger a resumption of foreclosure activity that slowed dramatically after the robo-signing scandal broke in the fall of 2010.

The settlement, which involves Ally Financial Inc., Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co., is the largest consumer financial protection agreement ever reached, according to federal housing officials.

But several analysts said it was dwarfed by the scope of the foreclosure problem.

"It's a small amount compared to the damage done to the economy," said Phyllis Salowe-Kaye, head of N.J. Citizen Action, the state's largest housing counseling agency.

She criticized the $2,000 payments that are to be made to foreclosed homeowners who were hurt when banks cut corners. "It means the cost of forging a document or doing a robo-signing is about $2,000 a loan," she said. (Federal officials said, however, that homeowners who suffered greater harm can still seek restitution through another federal program.)

"I think it's a very small net positive for the housing market," said David Stiff, an economist with Fiserv, a Wisconsin-based financial technology company. He said the settlement comes to only a "small fraction" of the estimated $700 billion nationwide that homeowners owe beyond their properties' value.

Principal reduction

Some applauded the settlement's requirement that banks reduce mortgage principal amounts for homeowners who owe more than their property is worth. More than 300,000 homeowners in New Jersey fall into that category, according to CoreLogic. The principal reductions are expected to affect 1 million homeowners nationwide, but it's not clear how they'll be chosen.

"In general, principal reductions are more effective than other types of loan modifications," Stiff said. But banks have been reluctant to reduce the principal owed on a mortgage, he said, because that forces them to take a loss on their books.

Jeffrey Otteau, an East Brunswick appraiser who tracks the housing market statewide, also said the principal reductions will help avert foreclosures, especially since the state's job market is improving.

"To the extent that homeowners who have been struggling will see their mortgage balance reduced, at a time when they're increasingly likely to be able to find work, that should result in fewer new foreclosures occurring," Otteau said.

Peggy Jurow, a Legal Services of N.J. lawyer who represents homeowners facing foreclosure, said she could not comment on the settlement before seeing more details. But she raised several questions, including whether the aid will be enough to "keep people in their homes and thereby stabilize hard-hit neighborhoods."

N.J. case pending

Foreclosures plunged 80 percent last year in New Jersey, after Chief Justice Stuart Rabner ordered banks to show they were not robo-signing foreclosure documents. Even though a judge has cleared the large lenders to begin filing again, many are holding back, awaiting a state Supreme Court decision on a foreclosure that was challenged because a notice sent to the defaulting homeowner listed the servicer of the loan, not the actual owner, as required by the state's foreclosure laws.

Governor Christie praised the settlement, saying, "Over $700 million will go directly to homeowners here in the state who have been disadvantaged by some of the conduct by the banks during the foreclosure crisis."

This settlement is separate from previous government efforts to help homeowners facing foreclosure, including a recent proposal by Obama that underwater homeowners be allowed to refinance their mortgages with Federal Housing Administration backing.

Servicers have three years to fulfill the financial part of the settlement, and have incentives to act within the first 12 months. Over the next six to nine months, homeowners and former homeowners who may be eligible for the aid will be identified and contacted by their mortgage servicers or an administrator to be named by the settlement negotiators.

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