US, state governments in $25bn deal to solve foreclosure crisis

09 February 2012 17:00  [Source: ICIS news]

WASHINGTON (ICIS)--US federal and state governments on Thursday announced a $25bn (€18.7bn) agreement with five major mortgage loan banks to address foreclosure processing issues and provide financial relief to homeowners at risk of default.

US attorney general Eric Holder and state attorneys general from 49 of the 50 US states announced the deal in Washington, saying that the agreement with major lenders also will establish significant new homeowner protections going forward.

The arrangement is aimed at keeping some of the estimated 12m US homeowners who are already in default on their home loans or are “under water” on their mortgages from falling into foreclosure and losing their homes.

A home owner is said to be under water when he owes more on the mortgage loan than the residence is worth.

The long-running US housing crisis has devastated the home building industry, forcing many housing contractors out of business and reducing residential construction rates to all-time lows.

The housing market and new home construction in particular are important downstream consuming sectors for US chemicals and resins manufacturers, accounting for a wide range of chemicals-based products such as paints, roofing and insulation materials, adhesives, plastic pipe, fibres and many others.

Holder said that the deal arranged with the five major lenders – Bank of America, JPMorgan Chase & Company, Wells Fargo, Citigroup and Ally Financial (formerly GMAC) – “requires them to commit more than $20bn towards financial relief for consumers”.

“As a result, struggling homeowners throughout the country will benefit from reduced principals and refinancing of their loans,” Holder said, adding that the deal will “force banks to reduce the principal balance on many loans [and] refinance loans for underwater borrowers.”

It also will require mortgage banks to reform their procedures for dealing with borrowers, including improvements in banks’ foreclosure processes.

During the housing crisis, many banks were found to have processed foreclosures through what was termed “robo-signing” of documents needed to take back properties from delinquent home owners.

According to charges made by multiple state attorneys general and prosecutors, the robo-signing process involved slipshod, high-volume processing of foreclosure documents without adequate review or proper procedures.

For the five major mortgage lenders involved in the settlement, the deal provides them with immunity from further prosecution for past robo-signing violations or other foreclosure processing errors.

However, the settlement might not be directly beneficial to the US new home construction industry.

Observers say that reform of lenders’ foreclosure processing – and especially the deal’s insulation against prosecution for earlier foreclosures – could mean that the foreclosure floodgates will now open, bringing perhaps hundreds of thousands of repossessed properties to the market.

Banking officials have reported that because lenders were unsure how the robo-signing accusations and possible prosecutions might be resolved, banks have been sitting on an untold number of foreclosures.  Those proceedings might now resume in force, sources say, pouring more empty homes onto the already flooded market.

In addition, under water homeowners who see their mortgage loan balances cut back through the new settlement may be in a position to put their homes on the market with some reasonable prospect of getting enough in the sale to dispose of their debt.

That also could result in a new wave of for-sale existing homes hitting the market.

($1 = €0.75)

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy


By: Joe Kamalick
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