U.S. mega banks have decided to pay as much as $5 billion to settle critical deficiencies related to the foreclosure process, the Wall Street Journal reported today. These banks are willing to cough up the amount to address claims by federal and state officials for their mortgage foreclosure malpractices.
Following the detection of critical deficiencies related to the foreclosure process,U.S. bank regulators were gearing up to punish mortgage servicers. But the initiatives were dramatically held back by inter-group bickering over the strictures of a defrayal.
Though the regulators failed to reach an agreement due to problems in framing a universal settlement, a monetary settlement amounting more than $20 billion was suggested by some. However, the proposed $5 billion payment is substantially lower than the suggested amount.
Tuesday saw the latest round of negotiation between state and federal officials with mega banks including Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Wells Fargo & Co. (WFC). According to one revised term sheet received by banks from government negotiators, mortgage-servicing practices need to be changed. The other term sheet primarily directs how penalties would be allocated.
It is difficult to say whether regulators will be satisfied with the $5 billion offer from the mega banks or not, but the penalty would come as a lesson to mortgage servicers and abate the looming threat on housing recovery.
What Went Wrong?
In the foreclosure process, many lenders use ‘robo-signers’: employees who sign hundreds of documents a day without verifying decisive information like the outstanding amounts of previous borrowers.
Despite being aware of the imminent danger, the negligence of homeowners and lawyers aggravated this problem. In many cases, signatures were not reviewed by any notary. Even when notarizations took place, it was unlikely that the officials executed the signings keeping legal requirements in mind.
Flawed paperwork also raised questions about the validity of the ownership documents. There are many cases in which an individual who moved into a house after a payment may not be the legal owner. This ended up in mortgage lenders improperly expelling original owners from their homes as part of their foreclosure process.
Is an End in Sight?
The U.S. bank regulators and a task force of Attorneys General (AGs) of all 50 states are trying to clear the foreclosure mess as quickly as possible. This would undoubtedly mitigate threats to the housing recovery.
According to bank regulators’ order sent to 14 institutions in April, banks need to improve foreclosure practices. Banks will get 60 days to chalk out a rectification plan their mortgage-servicing flaws. Also, the regulators require institutions to hire an independent third-party consultant to identify flaws related to foreclosures in the last two years.
Still a Concern?
Whatever the settlement, it will take a long time to control regulatory violations that would in turn put an end to the foreclosure crisis. While regulators battle out how to put the housing sector back in order, we can only wait until a concrete settlement is reached.
Needless to mention, repercussionsof faulty paperwork could actually make it very difficult for lenders to find home buyers over the years to come.
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