Mortgage Settlement Helping Homeowners and Exceeding Expectations

In this Jan. 5, 2013, photo a "for sale" sign is seen outside a home in Glenview, Ill. Five of the biggest U.S. banks have cu
In this Jan. 5, 2013, photo a "for sale" sign is seen outside a home in Glenview, Ill. Five of the biggest U.S. banks have cut struggling homeowners' mortgage balances by $19 billion, part of a total $45.8 billion in relief provided under a landmark settlement over foreclosure abuses. (AP Photo/Nam Y. Huh)

Americans are starting to feel a sense of hope about our economy for the first time in half a decade -- and a big reason is the rebound in the housing market. It certainly hasn't always been this way. It was only a few years ago when we learned that many of the same financial institutions responsible for causing the housing crisis -- through predatory loans and exploding adjustable rate mortgages (ARMs) -- were actually making it worse by foreclosing on homeowners without verifying paperwork, losing documents, and failing to provide even the most basic assistance that might have helped families save their homes.

That was why one year ago, we took action, through a historic, bipartisan settlement between the Federal government, 49 state attorneys general and the five largest mortgage servicers -- the second largest consumer relief settlement in the nation's history. As a result, between March and December over 550,000 homeowners received nearly $46 billion in overall consumer relief, with homeowners receiving roughly $82,000 in benefits on average.

At a moment when Americans have been looking for Washington to put partisanship aside to deliver results, the most recent report from the National Mortgage Servicers Settlement's Independent Monitor indicates that families and struggling homeowners can get what they are promised when we work in a bipartisan way.

The cash payments, consumer relief and servicing standards imposed by that settlement are bearing fruit. State attorneys general across the nation have allocated more than $300 million for housing counseling and legal aid to help borrowers avoid foreclosure. The report also demonstrates significant progress on the broadest and most robust principal reduction program in our nation's history. Because of the settlement, banks have provided more than $22.5 billion in completed and trial principal reduction that helps borrowers stay in their homes, lowering the monthly payments on more than 266,000 loans and reducing struggling homeowners' loan balances by more than $84,000 on average.

The settlement has already far surpassed our initial expectations of total consumer relief and will likely grow to more than $50 billion. When we began the settlement negotiations, many critics claimed that large-scale principal reduction could not work or families would purposely default to unfairly receive a modification. Those predictions have been proven wrong. Indeed, the principal reduction provided through the settlement has made a real, significant and lasting difference for thousands of struggling homeowners.

The settlement has helped single mothers like Vanessa Fair in Chicago who has four foster children and fell behind on her adjustable rate mortgage because of medical issues. She worked with a HUD-approved housing counseling agency and is now current on her mortgage and in a trial modification that will reduce her principal by $40,000.

Another single mother, Maria Garcia, fell behind on her mortgage when she was laid off in 2009. Concerned about her three children growing up in an unsafe neighborhood, she worked with a housing counseling agency and not only is she current on her mortgage again, she has received a permanent modification that has reduced her loan balance by $120,000. Maria credits the Mortgage Settlement with helping her family keep their home.

And yet, despite many stories like Vanessa's and Maria's nationwide, some remain unconvinced that the settlement is really making a difference or that banks are beginning to meet their obligations. Still others have criticized the settlement based on inaccurate assumptions about the data or the settlement terms.

For example, a number of recent articles inaccurately state that short sales are the equivalent of foreclosures and that the bulk of relief provided under the settlement thus far comes from short sales. Neither of those statements is true. It is important to note that principal reduction modifications, not short sales, are the bulk of the relief provided by the settlement. Short sales represent less than 43 percent of the total assistance provided and have decreased as a share of relief in every Monitor's report since August 2012. Furthermore, the settlement requires that, regardless of what a snapshot of relief looks like at the time a report is published, ultimately at least 60 percent of the servicer's credits must come from principal reduction, and at least half of that must be for first lien principal reduction.

The increase in short sales, combined with the settlement's requirements that borrowers be properly evaluated for modifications, is a positive, not a negative sign. Short sales are helpful for borrowers who need to leave their underwater home or those who cannot make sustainable payments, even on a modified loan. When we negotiated this settlement, too many borrowers in those circumstances were forced into foreclosures and were left with a deficiency balance when a short sale would have been better for them, their neighborhood, and the loan's investor.

There have also been recent press accounts indicating that banks are eligible to receive credit for activities that are not, in fact, creditworthy. These examples include banks forgiving a homeowner's second lien while foreclosing on the first they also hold. In fact, as the settlement makes clear, and Joe Smith, the independent Settlement Monitor confirms, he will not give any credit for a modification that does not provide a tangible benefit to a homeowner.

Approximately $1.5 billion of the funds recovered in the national settlement are being used to compensate borrowers who lost their home to foreclosure during the period of January 1, 2008 to December 31, 2011. Checks to borrowers who submitted claim forms are expected to be mailed by the mid-summer. However, this money is not, nor was it ever, intended to fully compensate families who were wrongfully foreclosed upon. That is why the settlement has carefully preserved those borrowers' rights to seek additional restitution.

The job's not done -- and we will continue to watch the banks like hawks to ensure they live up to their obligations as they complete their consumer relief requirements and we measure their progress on implementing new and improved servicing standards.

No settlement by itself can turn the housing market around or right all wrongs. But by failing to accurately describe the results, recent reporting does a disservice to the more than 550,000 homeowners and their communities who have benefited from the settlement.