Big Banks Play Let’s Make a Deal
According to Iowa Attorney General Tom Miller, more than 40 states have signed a proposed settlement agreement involving the nation’s largest mortgage providers in the robo-signing scandal. Robo-signing was placed in the spotlight in 2010. It involves thousands of foreclosure documents signed by one employee without proper verification, essentially stomping on the rights of homeowners. Some reports have revealed that one bank employee signed off on nearly 10,000 documents in just one month.
The settlement with Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), Citigroup (NYSE:C), JP Morgan (NYSE:JPM) and Ally Financial is expected to total $25 billion. The deal was reported to designate $17 billion of the settlement to pay for principal reductions and other relief for nearly one million borrowers behind in payments and owe more than their houses are worth. The settlement would also provide checks of $2,000 to roughly 750,000 people with lost and foreclosed homes. “This enables us to move forward into the very final stages of remaining work. Federal and state officials, as well as representatives from the banks, continue to address matters that they must complete before finalizing any settlement,” Miller said in a statement.
When the fraudulent robo-signing practices came to light, several major banks halted foreclosure actions in 23 states. Bank of America even ceased foreclosures in all 50 states. In order to avoid the headache and costs of dealing with foreclosures, banks are now offering large cash amounts to delinquent homeowners to sell their properties for less than they owe, which is called a short sale. Bloomberg reports that banks have decided the cash deals are faster and less costly than foreclosures. Furthermore, losses for lenders are about 15 percent lower on the short sales than on foreclosures.
“You could sell your home, owe nothing more on your mortgage and get $30,000,” JP Morgan wrote in a letter obtained by Bloomberg. A JP Morgan spokesman explained, “When a modification is not possible, a short sale produces a better and faster result for the homeowner, the investor and the community than a foreclosure.” JP Morgan is reportedly paying the largest cash deals, with a range between $10,000 and $35,000. However, other large banks such as Citigroup and Wells Fargo are also offering cash deals. Bank of America sent letters to 20,000 homeowners in Florida as part of a pilot program, offering as much as $20,000.
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Based upon the most recent month of data, short sales represented 9 percent of all U.S. residential transactions in November. According to RealtyTrac, bank-owned foreclosures and short sales sold at a discount of 34 percent non-distressed properties in the third quarter. Most bank stocks traded lower on the news Tuesday, with Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) leading the decline.
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