Mortgage giants --biggest settlement since Big Tobacco?

The nation’s five largest mortgage lenders have agreed to overhaul their industry after deceptive foreclosure practices unfairly evicted homeowners, government officials said Monday.

A draft for the proposed settlement between the banks and U.S. states has been sent to state officials for review. If it goes through, it would be the biggest settlement with a single industry in recent history--not since the big multi-state tobacco deal reached in 1998.

Who are the big five? Five major banks – Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial. It is rumored that other lenders may join motivated by the desire to further liability for unfair practices.
The settlement would only apply to privately held mortgages issued from 2008 to 2011, not those held by government-controlled Fannie Mae or Freddie Mac. Officials at Fannie Mae and Freddie Mac have refused to lower mortgage principals, saying the cost to taxpayers would be too high, according to Teresa Mears for MSN. Fannie Mae or Freddie Mac own about half of all U.S. mortgages, roughly about 31 million U.S. home loans, according to USA Today.

But who is to benefit? Not those who have already lost their homes to foreclosure. Even though the banks may have to pay as much as $25 billion in total to settle with the government, about 750,000 Americans – about half the households who might be eligible for assistance under the deal – would likely receive checks for about $1,800 each.

According toThe Associated Press, this how the money paid by the lenders as part of the settlement would be used:

• $17 billion would go toward principal reductions. If 1 million homeowners were to be helped, that would equal an average reduction of $20,000 each. About 11 million U.S. homeowners are underwater on their mortgages.
• $5 billion would go toward homeowners affected by the deceptive practices and to state and federal housing programs. The settlement envisions a payment of $1,800 each to 750,000 affected homeowners. About 8 million Americans have faced foreclosure in the past four years.
• $3 billion would help homeowners refinance their mortgage loans at a rate of 5.25%. That's more than 1 percentage point above current market rates, but most underwater homeowners are not eligible for refinancing. Some, however, have received rates as low as 2% as part of mortgage modification deals.