Consumer Federation of California

Consumer advocates questioned the effectiveness of an $8.5 billion settlement to resolve charges that 10 major banks mishandled foreclosures and loan modifications, saying details remain murky and that the amount of money will be minimal once distributed among millions of people.

Some of the settlement, which was announced by federal regulators after weeks of negotiations, will go directly to people whose homes were repossessed, while other funds are targeted to help struggling homeowners avert foreclosure.

“We want to see that borrowers are made whole in as many ways as possible,” said Sasha Werblin, senior program manager at the Greenlining Institute, a Berkeley nonprofit that works for economic equity. “The $8.5 billion and other settlements are not comparable to the trillions of dollars in wealth sucked from communities by” poor lending standards that triggered the housing crisis.

In a separate action also announced Monday, Bank of America agreed to pay $10 billion to Fannie Mae to settle charges that its Countrywide Financial subsidiary sold the agency mortgages obtained with slipshod underwriting, such as failure to verify borrowers’ incomes or homes’ values. Many of those mortgages, issued from 2000 to 2008, later went into foreclosure, triggering big losses.

The two huge settlements are seen as an indication banks are trying to put the mortgage meltdown behind them, even as distress continues to linger for many homeowners.

Direct payments

The pact with federal regulators calls for banks to pay $3.3 billion directly to 3.8 million borrowers whose homes were in the foreclosure pipeline in 2009 and 2010. Eligible homeowners will be contacted by late March and do not have to apply for the funds. They will retain their rights to sue over faulty foreclosures.

The other $5.2 billion will go toward loan modifications and other measures to help people stay in their homes.

“We’re terribly concerned that people are not going to get reimbursed at the level which they were led to believe would happen,” said Maeve Elise Brown, executive director of Housing & Economic Rights Advocates, an Oakland nonprofit. “It is not clear what remediation (path) will be followed.”

The participating banks are Aurora, Bank of America, Citibank, JPMorgan Chase, MetLife Bank, PNC, Sovereign, SunTrust, U.S. Bank and Wells Fargo. Four other banks – Ally, HSBC, OneWest Bank and Everbank – eventually could sign on to the pact, which would increase the dollar amount involved.

Replacement program

The settlement replaces Independent Foreclosure Review, a massive effort to do case-by-case reviews in search of foreclosure mistakes. The program, which spent $1.5 billion on administrative costs and only attracted a fraction of the eligible homeowners to apply for help, was widely criticized as ineffective, biased toward banks and expensive.

“It has become clear that carrying the process through to its conclusion would divert money away from the impacted homeowners and also needlessly delay the dispensation of compensation to affected borrowers,” said Comptroller of the Currency Thomas J. Curry in a statement. “Our new course of action will get more money to more people more quickly.”

Despite several deadline extensions and a recent flurry of outreach, many homeowners ignored the independent review program, either because they were disillusioned, weary of not getting help, or wary of scams.

“I think I may well have gotten some notices that I could qualify (for the Independent Foreclosure Review) but I’ve received so many predatory things saying, ‘We’ll help you, but of course you’ve got to pay money’ that I wasn’t sure what was legitimate,” said Gaylynne Hudson of Oakland, who has been struggling to avert foreclosure on her Fruitvale district home since 2010. She underwent a double financial whammy: Her marriage ended and she was laid off from her job as a literacy teacher in Oakland Unified’s adult education program.

Her home was slated to go on the foreclosure auction block on Monday, but she won a one-month postponement.

Her advice on structuring assistance for people like her: “Just make it not confusing. Set up parameters that are simple and straightforward so people can navigate the system.”

Multiple settlements

The $8.5 billion pact is separate from another initiative, the National Mortgage Settlement, which will soon disburse payments of about $1,500 to $2,000 to many foreclosed-upon people under a settlement reached between 49 state attorneys general and the nation’s five largest banks. The deadline to apply for that money is Jan. 18; information is at www.nationalmortgagesettlement.com. The settlement also offers relief through loan modifications, principal reductions and other measures.

Katherine Porter, a law professor at UC Irvine who acts as an independent monitor of the national mortgage settlement for California, said she hopes it serves as a model for the latest program.

“Clear standards, hard deadlines, robust independent enforcement are key in getting relief out the door and making a settlement work,” she said.

California Attorney General Kamala Harris said in a statement that the latest relief would be on top of the $18 billion negotiated for California homeowners in the national mortgage settlement.

“Transparency and enforceability are critical to ensure that these funds get to the homeowners who need them, and I expect that the OCC has incorporated these safeguards,” she said.