On Feb. 9, 2012, the United States Justice Department released the $25 billion settlement they reached with five major banks.
The settlement occurred because the banks were accused of widespread use of robo-signing, which was a practice used by the banks to automate the processing of foreclosure against homeowners.
It has been 10 months since it was announced. So, how has the money been used to help homeowners?
Out of the $25 billion, $5 billion was the only amount that was a mandated payout to be paid in $2,000 payments to homeowners who had been foreclosed on. The remaining $20 billion was split into three areas. A total of $10 billion to assist homeowners who were delinquent on their mortgages, $7 billion to help with short sales, forbearance and relocation assistance and $3 billion to help homeowners refinance.
With $17 billion dollars being allocated to help homeowners in distress, it was thought the best way to achieve this would be through principal reductions. This is not what has happened, and only 7,093 people have seen a principal reduction on a first lien modification. Even though this settlement had funds set aside for it, the banks and the government are still not willing to go down that road. Principal reductions are just not going to happen (other than a few with very specific situations).
More than half of the $25 billion dollars already has been spent. So, if homeowners are not getting principal reductions and there has not been a huge increase in loan modifications, where has this money gone? As there was nothing mandating exactly where the money was to be spent, only that it had to be used for foreclosure alternatives, the banks pooled the $20 billion into one fund, and they are using this pool to offset any losses they incur on foreclosures, loan modifications and short sales.
Essentially, this $20 billion dollars is being used as a lump sum by the banks to credit themselves back. They are just transferring the funds from the pool back to the banks. While this may not have been how we thought the money was going to be used, and it certainly hasn’t helped homeowners remain in their homes as we had hoped, it has helped drive foreclosure alternatives at a faster pace, specifically short sales.
As much as 80 percent of the funds spent so far has been used for short sales. Short sales are outnumbering foreclosures, especially here in Arizona, and will continue to do so, certainly while the banks can offset the loss against the settlement funds.
There also were servicing standards, which had to be implemented. The most important standard was that the banks are no longer allowed to continue with foreclosure procedures while a loan modification or short sale is being negotiated. This is huge for anyone who has a foreclosure notice, and will allow the homeowner to remain in the house until the short sale has been approved without the fear of being foreclosed on.
As long as there are still funds available in the settlement, the major banks are more willing to do a short sale than ever before. If you think a short sale may be the right option for you, now is the time to do it.
To find out more about this settlement, or a free confidential consultation on short sales and the options available, please contact me at (602) 571-6799, send an e-mail to Lorraine@ArizonaShortSaleToday.com, or visit my Web site at www.ArizonaShortSaleToday.com.