WASHINGTON -- Almost 4 million homeowners might receive cash compensation and mortgage relief in a multibillion-dollar settlement with 10 major banks, government regulators announced Monday.
Bank of America, JPMorgan Chase, Wells Fargo and seven other mortgage-servicing firms have agreed to give borrowers $3.3 billion in direct payments and $5.2 billion in loan modifications and other assistance to settle allegations that they wrongly foreclosed on homeowners in 2009 and 2010. The other lenders are Citibank, MetLife Bank, PNC, Sovereign, SunTrust, U.S. Bank and Aurora.
Eligible homeowners may receive payments that range from hundreds of dollars to $125,000, depending on the type of error.
The settlement amounts to a mea culpa by mortgage servicers, which are effectively bill collectors for investors who collectively own mortgages pooled together, often by Wall Street firms, into complex bonds called mortgage-backed securities.
Many servicers were first set up by Wall Street banks, such as Bear Stearns and Lehman Brothers, that disappeared or collapsed during the U.S. financial crisis in 2008. Wall Street banks infamously looked past poor underwriting, particularly in boom states such as Florida and California, because the buck was passed to unsuspecting investors, who thought that they were buying AAA-rated mortgage bonds -- prompting the slogan, "A rolling loan gathers no loss."
But as more and more borrowers failed to meet their mortgage commitments or saw their home values plunge, a housing crisis gained steam in 2008 and 2009. Servicers were overwhelmed with requests for loan modifications, and the problem of homes that now are worth less than the mortgages they carry continues to bedevil the housing market.
The agreement announced Monday ends an "independent foreclosure review" of 4 million loan files mandated in a 2011 enforcement action by the Office of the Comptroller of the Currency and the Federal Reserve. The costly and time-consuming process required banks to hire independent consultants to review the files on a case-by-case basis to identify mistakes such as lost paperwork, miscalculated payments, illegal fees and other slipshod mortgage servicing and foreclosure practices.
The Government Accountability Office reported in July that the review was too complex, and that borrowers "might not be motivated to participate." Regulators said the settlement announcement Monday would provide more speedy relief to borrowers, who now will receive compensation regardless of whether they have filed requests for review.
Bank officials said they were pleased to have the independent foreclosure review behind them. "We have helped nearly 1 million homeowners avoid foreclosure over the last four years and will continue to help others who may be struggling to make their payments," JPMorgan Chase spokeswoman Amy Bonitatibus said.
Pittsburgh-based PNC, which said in its annual report last year that it expected the enforcement actions, declined Monday to disclose how much it agreed to pay, but said the bank was a relatively small player in the residential mortgage-servicing business. PNC's share of the payout "is proportional to the relative size of our servicing portfolio, which is approximately 2 percent of the 3.8 million borrowers," or roughly 76,000 homeowners, the bank said in an email.
Also Monday, Bank of America announced a separate settlement in which it will pay mortgage giant Fannie Mae $3.6 billion and buy back more than 30,000 loans to resolve a long-running dispute between the two. The Charlotte, N.C.-based bank will pay more than $10 billion in total.
The settlement covers mortgages totaling about $1.4 trillion originated primarily by Countrywide Financial Corp. and sold to Fannie Mae from 2000 to 2008.
After the former Countrywide mortgages started to go sour, Fannie Mae sought to force Bank of America, which bought Countrywide in 2008, to buy them back, claiming that the bank had misrepresented the quality of the loans. The two battled over the loans for at least a year.
A large portion of the settlement will be paid from the bank's reserves. The agreements will cut into Bank of America's fourth-quarter earnings by about $2.7 billion, the bank said.
A payment agent will contact eligible homeowners by the end of March to administer payments, regulators said, adding that those affected by the settlement don't need to take any action.
Monday's settlement came on the heels of a massive $25 billion settlement last February between 49 state attorneys and five major banks: Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial. The banks acknowledged abuses in the foreclosure process such as robo-signing, in which documents were processed without proper documentation and often with forged signatures.
Maryland Rep. Elijah Cummings, the top Democrat on the House Committee on Oversight and Reform, said he was deeply disappointed that government watchdogs had finalized the settlement before answering congressional questions about how the amount was determined, how money would be distributed and what would happen to other families who hadn't yet had their cases reviewed.
Post-Gazette staff writer Patricia Sabatini contributed.