Yesterday, administration officials stood alongside state attorneys general to announce a $25 billion mortgage settlement. It was reminiscent of a big announcement by administration officials three Februarys ago involving an even bigger number: $50 billion. That money was supposed to go to the administration’s signature mortgage modification program, which eventually became HAMP.

Three years later, HAMP (the Home Affordable Modification Program) is widely considered a failure. That failure provides key context to yesterday’s announcement.

President Barack Obama, joined by federal and state officials, speaks about the details of a $25 billion housing settlement between federal and state officials and mortgage lenders on Feb. 9, 2012. (Kevin Dietsch-Pool/Getty Images)

“If people are eligible for a loan modification, the banks won’t screw up those decisions anymore,” said Iowa Attorney General Tom Miller.

North Carolina Attorney General Roy Cooper made a rather pointed reference to HAMP: “I think strong, court-ordered enforcement with teeth distinguish this deal from those earlier efforts to help homeowners.”

As we’ve reported extensively over the past several years, homeowners seeking to avoid foreclosure by gaining a loan modification have often been frustrated by banks’ errors and delays. In the worst cases, the banks’ shoddy mortgage servicing has led to wrongful foreclosures. The errors have sometimes continued even after homeowners got an elusive modification.

When HAMP was launched, it came with the promise that mortgage servicers would have to abide by clear rules. The handbook laying out these rules now approaches 200 pages. But as we’ve detailed, enforcement of those rules has been lacking.

According to the state attorneys general, the settlement directly addresses that. The five big servicers — Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial (formerly GMAC) —  that will sign on to the not-quite-finalized deal have agreed to follow a raft of new rules. Some of these rules, like how quickly a bank must respond to a homeowner’s completed modification application, come straight from HAMP.

What’s different this time, they say, is that there are clear consequences for rule-breaking. But plenty of questions remain, and only time will tell if the latest promises of mortgage-servicer accountability will be kept.

“The big picture is that these new rules are only good if servicers follow them,” said Alys Cohen of the National Consumer Law Center. “Enforcement will really matter.”

As critics like Firedoglake blogger David Dayen have pointed out, the new system relies to some extent on “self-assessments” by the banks to identify violations of the new rules. But Miller, the Iowa attorney general, notes that consumers will be able to complain to their state’s attorney general, who will make sure their complaints are heard.

The settlement does create a “monitor” who will have the power to impose penalties. The administration says a bank could be fined up to $1 million per violation and up to $5 million for repeat violations. But the details released so far don’t show how violations will be applied or counted. (If thousands of homeowners, for instance, have been wrongly denied modifications, will that be counted as one violation or thousands?)

HAMP came with no penalties for participating mortgage servicers that broke the rules. It was only in the past several months that the Treasury Department decided to address servicer noncompliance — by temporarily withholding the program’s subsidy payments. (As for the millions of dollars in incentives that Bank of America, JPMorgan Chase and the other servicers were paid over the previous years, they get to keep that.)

The settlement is not only supposed to have more sticks than HAMP, it’s also a chance for the administration to breathe life back into the old program. Treasury recently made major revisions to HAMP to allow more homeowners to qualify for modifications.

“The extension and expansion of HAMP are designed to be complementary to the settlement,” said Treasury spokeswoman Andrea Risotto.

For instance, the program was set to end at the end of 2012 but now will accept new homeowners until the end of 2013. (The banks will operate under the umbrella of the settlement through 2014 or so.) In addition, Treasury has broadened some of the criteria to make it easier to qualify.

Some of the millions of homeowners who were rejected might be eligible for a second shot. Hundreds of thousands of homeowners were originally granted “trial modifications” through the program in 2009 and early 2010, only to be denied permanent modifications many months (and sometimes more than a year) later. Most of those homeowners started those trials by just giving their income information over the phone. They’ll be eligible to reapply, according to the proposed rules.

One of the recent changes to HAMP could reduce the cost of the settlement for banks — and leave taxpayers footing a chunk of the bill.

As part of yesterday’s deal, the five banks agreed to reduce billions in mortgage debt for homeowners in danger of foreclosure. Most of those principal reductions — about 85 percent according to Housing and Urban Development Secretary Shaun Donovan — will likely be for loans that the banks hold on their own books.

HAMP also has long offered investors incentives to encourage principal reductions. For loans owned by banks, the money goes right to them. In January, Treasury tripled those incentives. In cases in which a loan qualifies for HAMP, the government will now pay investors, often the banks themselves, up to roughly two-thirds the cost of a principal reduction.

The banks have agreed to perform at least $10 billion worth of principal reductions as part of the settlement. Because it’s unclear how many of the principal reduction modifications will be done through HAMP, it’s impossible to say how much of that will be covered by the government subsidies.

So far, about 40,000 HAMP modifications have been done through HAMP’s principal reduction program at a median reduction of $67,196, meaning that roughly $2.7 billion in principal has been reduced. If the banks find HAMP more attractive because of the increased incentives, that amount might increase sharply, and HAMP could experience something of a renaissance.

But from what I have seen so far, the settlement will do very little to help the housing market. It will benefit the banks who will be able to use the money they are paying for their illegal practices to fix problem mortgages on their books, and reward those who took out mortgages they could not afford instead of helping those who are innocent victims of the housing mess.

Of the $25 or $26 billion (both figures have been mentioned) only $20 billion is set aside to reduce interest payments or mortgages, and $17 billion is for those facing foreclosure with the five banks.

Only $3 billion is left for those who are responsible and despite being under water on their homes, are current on their mortgage payments and the only benefit they can receive is to have their mortgage rates reduced to 5.25 percent.

The banks have THREE years to use the money to help the homeowners. That will be too late for too many people.

And there are one million homeowners who would be eligible, those whose mortgages were handled by the five banks: “The biggest, Bank of America, would provide $11.8 billion, followed by $5.4 billion from Wells Fargo, $5.3 billion from JPMorgan Chase, $2.2 billion from Citigroup and $310 million from Ally. Bank of America would contribute an additional $1 billion for Federal Housing Administration loans,” the New York Times reported.

By my math the $20 billion divided by one million comes out to $20,000 for the average family. Now that might make a big difference those those with small mortgages, but what does it do for those who have $200,000 to $400,000 mortgages? Not a lot.

And about half of the money will go to Florida and California, according to the New York Times:

“Homeowners in two states — Florida and California — will reap more than half of the $26 billion settlement, a reflection of the disproportionate number of loans that are delinquent or exceed the value of the underlying property there, government regulators said.”

Most of the money is set aside to help those who are at risk of foreclosure – $17 billion – which means that the banks are helping themselves with their troubled loans, and little is left for those who are current in their mortgage payments.

And if nine other major mortgage servicers join the pact, a possibility that is now under discussion with the government, the total package could rise to $30 billion.

First of all we are only talking about $25 billion, which is a drop in the bucket compared to the scope of the problem involving millions of foreclosures and the 25 percent of all mortgages that are under water (meaning that the mortgage is higher than the value of the home).

Part of the $25 billion – about $1.5 billion – will go to 750,000 people to those who lost their homes to foreclosure during the past four years. They will each receive $1,500 to $2,000 whether their foreclosures were done legally or illegally.

These facts trouble some, including Dick Bove, a banking analyst.

“Those people lucky or smart enough to stop making payments on their homes may get their loan balances reduced,” Bove, vice president of equity research at Rochdale Securities,   said on CNBC TV Thursday. “Other beneficiaries of the agreement may be homeowners who have seen the value of their houses drop below the size of their mortgages. They get a freebie that other homeowners who have paid their mortgages down will not get.”

Bove, who called the agreement “the mortgage deal from hell,” said doing so will help those who bought homes with little money down and who either fell behind on payments or stopped paying their mortgages altogether.

“Those who brought down their principal with 20 percent down payments and who kept up on their obligations would not benefit, and ultimately could suffer if the mortgage modifications and principal writedowns drag down neighborhood property values.”

“The government has selected a small minority of homeowners to get this benefit (1 million of 75 million or 1.3 percent of the total),” he wrote in an analysis. “Homeowners who made large down payments on their homes or made the terrible mistake to pay down the principal on their mortgages do not qualify. Homeowners who made minimal or no down payments will get the windfall benefit of a lower principal repayment or a cash payment.”

According to Jepsen, , a member of the negotiating team:

• Connecticut borrowers will receive an estimated $119 million in benefits from loan term modifications and other direct relief.
• The estimated 7,500 Connecticut borrowers who lost their home to foreclosure from January 1, 2008 through December 31, 2011 and suffered servicing abuse would qualify for an estimated $1,500 in cash payments to individual borrowers.
• The value of refinanced loans to Connecticut’s underwater borrowers would be an estimated $36 million.

The state will receive a direct payment estimated at $27 million to help pay for local foreclosure prevention programs, such as the Connecticut Department of Banking’s foreclosure prevention hotline, HUD- approved housing counselors, the Judicial Branch’s foreclosure mediation program, non-profit legal aid groups that help homeowners facing foreclosure, and loan modification programs supported by the Connecticut Housing Finance Authority.

While all this seems wonderful, watch for the details and also see who benefits and who doesn’t. My initial impression is that those who knowingly bought houses or condos without any downpayment and could not afford the homes, may get partially bailed out, especially if they stopped making mortgage payments, while those who were responsible got nothing.

Also, my understanding is that government backed mortgages are not included in this deal.

Here is the rest of Jepsen’s statement from today:

Attorney General George Jepsen, a member of the negotiating team, joined Thursday in the national announcement of a landmark $25 billion joint federal-multistate agreement with the nation’s five largest mortgage servicers over foreclosure abuses and fraud, and unacceptable nationwide mortgage servicing practices.

The largest joint federal-state settlement in history was produced after 15 months of intense negotiations. All 50 states are participating. It provides more than $190 million in relief to Connecticut homeowners and the state, and imposes new consumer protections on future mortgage loan servicing practices.

Jepsen was among a bipartisan group of state attorneys general in Washington D.C. participating in the announcement Thursday with U.S. Attorney General Eric Holder, U.S. Housing and Urban Development (HUD) Secretary Shaun Donovan.

Under the agreement, Bank of America, Citibank, JP Morgan Chase, GMAC and Wells Fargo, have agreed to pay a combined $25 billion under a joint state-national settlement structure.

“I helped to negotiate and strongly support the bipartisan settlement reached with the nation’s largest mortgage servicing companies over their widespread and improper foreclosure practices. There are many reasons why I believe this settlement is good for Connecticut, but the most important reason is this: it provides immediate help to thousands of Connecticut homeowners at a time when they can still use that help to save their homes,” Jepsen said.

“As important as the financial relief, the settlement requires the banks to change the way they service distressed loans and it holds the banks accountable for what have become familiar abuses. For the first time, state attorneys general will have authority to monitor how federally regulated banks comply with the new servicing rules and to impose heavy penalties on those banks that fall short,” Jepsen said.

The unprecedented joint state-federal settlement is the result of a massive civil law enforcement investigation and initiative that included state attorneys general and state banking regulators across the country, and nearly a dozen federal agencies.  The settlement holds banks accountable for past mortgage servicing and foreclosure fraud and abuses and provides relief to homeowners.  With the backing of a federal court order and the oversight of an independent monitor, the settlement will stop future fraud and abuse.

Nationally:

• Servicers commit to provide a minimum of $17 billion directly to borrowers through a series of national homeowner relief effort options, including principal reduction.  Given how the settlement is structured, servicers will actually provide up to an estimated $32 billion in direct homeowner relief.
• Servicers commit $3 billion to a mortgage refinancing program for borrowers who are current, but owe more than their home is currently worth.
• Servicers pay $5 billion to the states and federal government ($4.25 billion to the states and $750 million to the federal government).  The state payments include funding for payments to borrowers for mortgage servicing abuse.
• Homeowners receive comprehensive new protections from new mortgage loan servicing and foreclosure standards.
• An independent monitor will ensure mortgage servicer compliance.
• Government can pursue civil claims outside of the agreement and any criminal case; borrowers and investors can pursue individual, institutional or class action cases regardless of agreement.

The settlement does not grant any immunity from criminal offenses and will not affect criminal prosecutions.  The agreement does not prevent homeowners or investors from pursuing individual, institutional or class action civil cases against the five servicers.  The pact also enables state attorneys general and federal agencies to investigate and pursue other aspects of the mortgage crisis, including securities cases.

The final settlement agreement, through a consent judgment, will be filed in U.S. District Court in Washington, D.C., and will have the authority of a court order.

In many cases, participating mortgage servicers will contact borrowers directly regarding loan modification and refinance options.  However, borrowers may contact their mortgage servicer at the numbers listed below to obtain more information about specific loan modification programs and whether they qualify under terms of this settlement. A settlement administrator hired by the state attorneys general may also contact borrowers and victims of foreclosure.

Bank of America: 877-488-7814

Citi: 866-272-4749

Chase: 866-372-6901

GMAC: 800-766-4622

Wells Fargo: 800-288-3212

More information will be made available as the settlement programs are implemented.

More information on the agreement is available at the following websites

“Those people lucky or smart enough to stop making payments on their homes may get their loan balances reduced,” said Bove, he vice president of equity research at Rochdale Securities. “Other beneficiaries of the agreement may be homeowners who have seen the value of their houses drop below the size of their mortgages. They get a freebie that other homeowners who have paid their mortgages down will not get.”

Dick Bove

Bove, who called the agreement “the mortgage deal from hell,” said doing so will help those who bought homes with little money down and who either fell behind on payments or stopped paying their mortgages altogether.

“Those who brought down their principal with 20 percent down payments and who kept up on their obligations would not benefit, and ultimately could suffer if the mortgage modifications and principal writedowns drag down neighborhood property values.”

“The government has selected a small minority of homeowners to get this benefit (1 million of 75 million or 1.3 percent of the total),” he wrote in an analysis. “Homeowners who made large down payments on their homes or made the terrible mistake to pay down the principal on their mortgages do not qualify. Homeowners who made minimal or no down payments will get the windfall benefit of a lower principal repayment or a cash payment.”

Banks Also Fined By Federal Reserve

The Federal Reserve Thursday also said it was imposing penalties totaling $766.5 million on five U.S. banks over their mortgage servicing practices.

The five financial institutions are Bank of America  JPMorgan Chase, Citigroup  Wells Fargo  and Ally Financial.

The Fed said it was imposing the penalties for “unsafe and unsound” practices in “mortgage loan servicing and foreclosure processing,” wrote CNBC.