About 1 million homeowners may get mortgage write-downs

WASHINGTON – Jan. 19, 2012 – About 1 million homeowners would get write-downs in the size of their mortgages under a proposed deal with banks over shady foreclosure practices, Housing and Urban Development Secretary Shaun Donovan said Wednesday.

The deal, which could be reached 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.

Talks among federal officials, state attorneys general and major banks to resolve allegations of “robo-signing” and other misconduct in foreclosures have dragged into their second year.

Donovan’s announcement came on the same day that two big regional U.S. banks disclosed they had set aside money related to mortgage servicing matters, a sign that lenders beyond the five largest mortgage servicers may join the expected settlement.

In exchange for $20 billion to $25 billion in relief to distressed homeowners, the banks – Bank of America, Wells Fargo, J.P. Morgan 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 a reduction of about $20,000 for each of the 1 million borrowers.

Prior administration efforts to jump-start 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. 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 Core Logic.

Donovan said the deal would be “far and away the largest principal reduction of the crisis” and a number of families would also “get direct compensation as a result of the settlement.”

Any settlement would not apply to mortgages owned by Fannie Mae or Freddie Mac, which together own or guarantee most of the U.S. mortgage market. The regulator that controls the two government-sponsored enterprises has resisted cutting their loans, arguing that it would cost U.S. taxpayers more money than other options would.

But lawmakers and top administration officials have pushed for a broader principal reduction program, and this settlement could lay the groundwork for that if Fannie Mae and Freddie Mac are swayed to test it out themselves as an alternative to the costly process of foreclosing on the mortgages of struggling borrowers.

The Obama administration in coming weeks will step up its efforts to help the housing market by expanding policies aimed at helping communities plagued by high unemployment rates and widespread foreclosures, the housing secretary said.

“You will hear a president who is going to be aggressive on housing, on the issues of refinancing and principal write-down,” Donovan said.

The White House will lay out a strategy that includes pilot programs to test new initiatives, such as a government plan to convert foreclosures into rentals.

The administration also wants to move ahead with a plan called “Project Rebuild,” which is a piece of Obama’s American Jobs Act that aims to have construction workers rehabilitate vacant properties.

Donovan said the $15 billion neighborhood stabilization program would create 200,000 jobs and be used to renovate thousands of vacant homes and properties nationwide.

Copyright © 2012 washingtonpost.com, Margaret Chadbourn; Aruna Viswanatha