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Settlement opens door for states to do more to help people stay in homes

by Tim Anderson ~ March 2012 ~ Stateline Midwest »
The long fight by states to prevent foreclosures and stabilize housing markets will be getting up to a $40 billion boost over the next three years as the result of a historic settlement with the nation’s five largest mortgage servicers.
Just as important, too, state attorney generals say, the joint state-federal settlement (the largest in U.S. history) establishes new standards and rules for the servicing industry.
“It puts a stop to many of the bad behaviors that contributed to the mortgage mess,” says Iowa Democratic Attorney General Tom Miller. He led the 16-month investigation and settlement negotiations, which stemmed from alleged improper activities by leading mortgage servicers, including the practice of “robo-signing” foreclosure documents.
The 11-state Midwest will receive an estimated $500 million in direct payments, according to an analysis of the final agreement done by The Council of State Governments. Soon after announcement of the settlement, questions were being raised about how states would and should use this money.
Plans in Wisconsin, for example, are to use much of the direct payments to help shore up its general fund. That drew criticism from some public officials who said the money should instead go toward helping distressed homeowners.
An executive summary of the agreement notes that the direct payments are designed to “repay public funds lost as a result of servicer misconduct” and “to fund housing counselors, legal aid and other similar purposes determined by state attorneys general.”
These payments are a relatively small portion of a state’s total benefits under the settlement.
The largest chunk of money will go to reducing the principal for borrowers whose homes are “underwater,” meaning the amount owed on the mortgage exceeds the value of the home. In the three Midwestern states hit hardest by the housing downturn — Illinois, Michigan and Ohio — more than 1 in 5 homes are either close to or are already underwater.
Increasing the number of loan modifications has been a top goal of many state policymakers, but it has not necessarily been a priority for mortgage servicers. In fact, housing experts say, servicers have had a financial incentive to pursue foreclosure — even if a loan modification was in the best interest of the borrower and investor.
The new settlement, the state attorneys general say, changes that dynamic by putting in place a new mix of incentives and mortgage-servicing standards.