The legal settlement reached Thursday among five big banks, the federal government and 49 states won’t fix the housing market, but it should help two categories of homeowners who are plentiful in California.
The $25 billion settlement has provisions aimed at people who are behind in their payments and under threat of foreclosure and for those who have kept up with their payments but whose homes are worth less than they owe.
People in the first category – those behind in their payments – will be eligible to have the principal they owe on their loans reduced, making it easier for them to catch up and remain current.
People in the second category will be eligible to refinance their loans even though they might not be able to meet the usual loan-to-value ratios required by banks.
It is these people who have probably been the most frustrated by the collapse of the market. They are generally employed, have good credit, and have kept paying on their loans even as many others have simply walked away from their homes and their loans and handed the bank the keys.
For their trouble, though, these folks have been told they cannot refinance to take advantage of historically low interest rates because their new loans would still be for more than their homes are worth, or at least too big to provide the 20 percent cushion banks typically require between the value of the loan and the value of the home.
It’s not yet clear how many of these people will be allowed to refinance, and exactly what the rules governing the process will be. All of that will be hammered out over the next six to nine months as the settlement is implemented.
The settlement covers loans owned and serviced by Ally/GMAC, Bank of America, Citigroup, J.P. Morgan Chase and Wells Fargo.
Is there any downside to the deal? There might be. By keeping some people in homes that they still cannot afford, the agreement might slow the inevitable clearing of the market, keeping it from hitting bottom. And the longer it takes for the market to hit bottom, the longer it will take to rebound.
Beyond that, elements of the deal reward those who have fallen behind in their payments, giving them a principal reduction, while providing only a refinance to those who have kept their payments current. This will strike some homeowners as unfair and could lead some who have struggled to keep up with their payments to instead let them go.