How Will Banks Divide $25 Billion Settlement?

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Audie Cornish talks to Chris Arnold about how money from the robo-signing agreement will be spent. The settlement — worth about $25 billion — will bring a huge increase in loan modifications and provide small checks to people who lost their homes to foreclosure.

ROBERT SIEGEL, HOST:

This is ALL THINGS CONSIDERED from NPR News. I'm Robert Siegel.

AUDIE CORNISH, HOST:

And I'm Audie Cornish.

We're going to take a closer look now at yesterday's landmark robo-signing settlement. Five big banks agreed to pay $25 billion to put an end to state and federal probes of alleged foreclosure abuses. Well, we wanted to know more about who's eligible to receive that money, who's not, and how will the banks decide between them?

Joining us now is NPR's Chris Arnold. Welcome, Chris.

CHRIS ARNOLD, BYLINE: Thanks, Audie. How are you doing?

CORNISH: So to start, Chris, we're going to talk about the two different groups here. There are those who have already lost their homes to foreclosure and those who are still hanging on. First the former, as part of the settlement, people who lost their homes through foreclosure can get up to $2,000 each. But is there going to be any attempt to determine whether those people were improperly foreclosed on?

ARNOLD: Right, that's a question I think a lot of people have. You know, are these people who were doing everything right and by no fault of their own lost their house? Or is this somebody who bought a house they could never afford and lied all over their mortgage application?

The short answer is everybody gets it. If you were a customer of one of these five banks and within certain dates, this is being referred to as crude mass justice, not individualized fact-finding. So, for this part anyway, there's not a lot of details being figured out about who deserves it and who doesn't.

CORNISH: All right, then. Let's go to the other group that stands to gain here: homeowners still clinging to their homes. What's in this for them and who exactly is eligible in that group?

ARNOLD: Well, the biggest thing in it for them is probably what's being called principal reduction. And this is kind of the big tamale of helping people stay in their houses when they're facing foreclosure. And what it sounds like is that's what it is: The banks would reduce the amounts of money that people owe.

So, if, Audie, if you'd bought a house and it was worth $200,000 and now it's worth $150,000, and you're having trouble making the payments, a powerful way to incentivize you to stay in the house and to make it more affordable is the bank says, OK, look, rather than take a big loss here, let's say, let's just forgive what you owe, that above the 150, you now owe $150,000. We'll give you a market interest rate. It's more affordable. You're more likely to stay there. That's probably the most powerful thing that some homeowners will be able to get.

CORNISH: So help me understand here. How many people will actually get real help through principal reductions?

ARNOLD: That's actually very interesting. I mean, there's a number we can throw out: Probably around 500,000 people is the short answer. But it's more interesting because about 80 percent of American homeowners are not qualified for this help. And the short version of the answer lies in the fact that Fannie Mae and Freddie Mac, in one way or another, control or own their loan. And these principal write-downs only apply to loans that are owned by the banks or some loans that are investor-owned.

The vast majority of loans out there are controlled by the government basically at this point: Fannie Mae, Freddie Mac, HUD, FHA, et cetera. And those organizations are not taking part in this so-called principal reduction approach.

CORNISH: Chris, one strange thing I've heard is that essentially foreclosures will go up, at least in the short-term.

ARNOLD: Yeah, absolutely. And that's sort of an ironic consequence of this. But because this big investigation has been hanging over the heads of all these banks, they've been afraid to push forward with too many foreclosures. Now that this settlement's resolved, it's like the cork has been pulled out of the bottle and millions of foreclosures are going to start to hit the market.

CORNISH: So, Chris, who's actually going to watch over the banks and, you know, make sure that they do it right this time?

ARNOLD: Well, this agreement - and a lot of people are saying this is a pretty big deal - there's going to be a monitor installed to watch over the banks. His name is Joe Smith. He's the current banking commissioner in North Carolina. A lot of consumer groups have a lot of respect for this guy, a lot of banks do too, so he could be really key in holding the banks' feet to the fire here.

CORNISH: That's NPR's Chris Arnold. Thanks so much, Chris.

ARNOLD: Thanks, Audie.

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