Day of Reckoning is Here for Major Players in Housing Market Collapse

Yesterday, the state attorneys general and federal officials arrived at a $25 billion settlement with Bank of America Corp, Wells Fargo & Co, JPMorgan Chase & Co, Citigroup Inc. and Ally Financial. Said banks have been taken to task over so called “robo-signing” – the banks' use of both forged and suspect paperwork to foreclose quickly on homeowners struggling to meet their mortgage payments.

The settlement comes after nearly a year and a half of back and forth discussion between banks and government.

Highlights of the deal: The banks will not be held liable for civil government claims over faulty foreclosures, nor for mishandling of loan modifications requests. Bank of American will ante up almost half of the settlement amount, to the tune of almost $12 billion. The banks would be given three years to complete write downs of principal write downs, refinancings as well as other forms of relief. As well, incentives will be given for swift action – in the next twelve months.

In addition, the settlement includes an estimated $17 billion that's earmarked for foreclosure-prevention measures. This would include reducing loan balances for borrowers who owe more than their homes are worth, and reducing interest rates for homeowners who are current on their loans.

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Overall, the settlement is the largest in the industry since an agreement in 1998 with tobacco companies. It will force the hand of the five largest banks in the country to completely redo their mortgage servicing practices, as well as decrease inflated mortgage loan balances for borrowers owing more on their homes than what they're worth.

Closing the barn door after the horse got out? While $25 billion is a staggering amount, consider that it's merely a fraction of $750 billion – that number represents home values around the nation that are collectively worth that much less than what's owed on mortgages.

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Perhaps the value of the settlement, while in part is financially restorative, lies more in the restoration of the faith of the American people, and in the renewal of the government's commitment to them. And this is just the beginning.

Illinois Attorney General Lisa Madigan was quoted as saying in the February 9^th washingtonpost.com article, “Settlement launches foreclosure reckoning”: “This is neither the beginning nor the end of our work to hold banks and other institutions accountable for the destruction they've caused families, communities and country. Today's settlement should serve as a warning.”

Indeed. As President Obama announced in his recent state of the union address, a task force, led by New York Attorney General Eric Schneiderman, will investigate the packaging of loans by the banks into securities, which suffered major losses as a result of the housing collapse.

Schneiderman was quoted as saying during a news conference: “The banks are getting very limited immunity. On multiple fronts, we will continue to investigate the mortgage crisis, and ensure that justice and accountability prevail.”

All of the states, save for Oklahoma, gave the settlement their thumbs up.