US Foreclosures to Rise after Settlement

The U.S. Department of Justice announced a $26 billion mortgage settlement between 49 states and the five biggest banks, which include JPMorgan Chase, Citigroup, Bank of America, Wells …

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The U.S. Department of Justice announced a $26 billion mortgage settlement between 49 states and the five biggest banks, which include JPMorgan Chase, Citigroup, Bank of America, Wells Fargo and Ally Financial. While many mortgage holders may be entitled to compensation for suffering abusive foreclosure practices by banks, experts suspect the more telling result will be a sharp rise in foreclosures as the settlement paves the way to move more paperwork through the system. RealtyTrac is forecasting a 25% increase in foreclosures in 2012, although the elimination of the U.S. “shadow inventory” of foreclosures should help give more definition to the health of the housing market, which in turn could lead to a faster recovery. For more on this continue reading the following article from TheStreet.

The foreclosure settlement could result in more foreclosure pain in the short-term as lenders and servicers will be able to more confidently move forward with previously delayed foreclosures when they have the proper documentation in place, according to RealtyTrac Vice President Daren Blomquist.

The U.S. Department of Justice announced on Thursday a broad $26 billion mortgage settlement between 49 states and the five biggest banks including Bank of America(BAC), JPMorgan Chase(JPM), Citigroup(C), Wells Fargo(WFC) and Ally Financial.

The breakdown of the settlement by bank was not disclosed although JPMorgan Chase and Wells Fargo have since said that their commitment under the settlement is $5.3 billion each.

While some homeowners will be eligible for principal reductions, refinancing and compensation for abusive foreclosure practices, the settlement might hurt the housing market as foreclosures might proceed now at a faster pace.

"The settlement is not a silver bullet that will solve the foreclosure crisis, but it should help to clear the cloud of uncertainty that’s been hanging over the foreclosure process over the past 16 months," Blomquist said in an email.

RealtyTrac expects the number of completed foreclosures or REOs to rise in 2012 to 1 million, a 25% increase over 2011.

Over the longer term, however, "a finalized settlement will help to more quickly clear the so-called shadow inventory, which will in turn help the housing market finally bottom out once and for all — provided that more roadblocks are not put up that stall the foreclosure process further," Blomquist said.

The settlement actually has introduced new servicing standards that make foreclosure "a last resort" by requiring servicers to evaluate homeowners for other loss mitigation options first. Banks will be required to notify homeowners of all loss mitigation options such as loan modifications, short sales, deed in lieu of foreclosure before considering foreclosure. Servicers will also be required to offer loan modifications so long as the net present value is positive.

The settlement earmarks $7 billion will go towards other forms of relief, including forbearance of principal for unemployed borrowers, anti-blight programs, short sales and transitional assistance, benefits for service members who are forced to sell their home at a loss as a result of a Permanent Change in Station order, and other programs

"Banks will be restricted from foreclosing while the homeowner is being considered for a loan modification. The new standards also include procedures and timelines for reviewing loan modification applications and give homeowners the right to appeal denials. Servicers will also be required to create a single point of contact for borrowers seeking information about their loans and maintain adequate staff to handle calls," according to the announcement.

Still, Blomquist notes that the principal writedowns, while reducing some of the risk of future foreclosures, will go to "only a fraction" of the 12.5 million borrowers who are seriously underwater meaning those who owe more than what their homes are worth.

This article was republished with permission from TheStreet.

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