About one million American homeowners would get writedowns in the size of their mortgages under a proposed deal with banks over shady foreclosure practices, U.S. Housing and Urban Development Secretary Shaun Donovan said Wednesday. The deal, which could be struck within weeks, would mark the largest cut in the mortgage load since the start of the credit crisis.
“We’re very close to a settlement that would both fix the servicing problems, but also help over a million families around the country stay in their homes and get help,” Donovan said at a U.S. Conference of Mayors meeting in Washington.
Donovan’s announcement came the same day that two big regional U.S. banks disclosed they had set aside funds related to mortgage servicing matters, a sign that lenders beyond the five largest mortgage servicers may join the expected settlement.
In exchange for between $20 billion to $25 billion in relief to distressed homeowners, the banks — Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial — will put behind them potential government lawsuits about improper foreclosures and abuses in originating and servicing the loans.
Using Donovan’s estimate, the settlement could provide roughly a $20,000 reduction each for the one million borrowers.
Prior administration efforts to jumpstart the housing recovery have fallen short of how they were promoted. Some states, including California and New York, have criticized negotiators as being too lenient on the banks and suggested the proposed settlement would not provide enough relief to the housing market.
The Obama administration has seen the broader foreclosure settlement as an opportunity to help reach more borrowers struggling financially as the five-year collapse in home prices persists.
Currently, banks have granted at-risk borrowers principal reductions on a limited basis.
“Principal reduction can have a substantial impact on the housing market nationally,” Donovan said.
With more than a 30-percent decline in home prices since 2007 and a huge number of vacant, foreclosed homes flooding the market, the housing sector has struggled to rebuild itself. About 22 percent of U.S. homes have negative equity totaling about $750 billion, according to CoreLogic.
Donovan said the deal would be “far and away the largest principal reduction of the crisis” and a number families would also “get direct compensation as a result of the settlement.”