National Mortgage Settlement Details – What Does It Mean?

The National Mortgage Settlement has been in the news recently and that is because the settlement has finally been agreed upon and released to the public. Here are the basic details of the settlement.

Banks Involved: Ally/GMAC, Bank of America, Citi, JPMorgan Chase and Wells Fargo

States Involved: The Federal Government and 49 States (Oklahoma being the exception).

Total Dollars: $25 Billion

HOW CAN THIS AFFECT YOU? 

The largest portion of the $25 Billion dollar settlement, some $17 Billion, must be used for principal mortgage reductions and other mortgage modification programs. This is only to be used for borrowers who cannot afford to pay their full mortgage. It appears that these dollars (17 billion) are only for borrowers who are behind on payments or in some sort of default stage.

For those borrowers who are current on their mortgage but under water, $3 Billion has been set aside to assist with refinancing these mortgages.

For borrowers who lost their homes to foreclosure, roughly $1.5Billion will be distributed to these borrowers. In total there are about 750,000 borrowers who will receive some sort of distribution.

How long will all this take? The federal government is estimating that this settlement will be executed over the next 3 years. The government is currently working with the 5 banks on putting administrators in place to help execute the settlement and identify qualifying borrowers.

It is important to note, however, that loans owned by Fannie Mae & Freddie Mac are NOT affected by this settlement.

DOES THIS AFFECT OR HELP THE MARKET AS A WHOLE?

The $25 Billion settlement will do very little to help the market. It is a positive step and the settlement amount and the way it is implemented shouldn’t hurt the market any, however it is only a drop in the bucket in the huge pool of borrowers that are in default status or underwater on their mortgages. It is nowhere near large enough to have any substantial affect on the market.

The largest affect we might see, could be negative. This is not due to the amount of the settlement or the way it is implemented, but by the 5 banks holding off on foreclosures in the past year. These banks, including others watching the settlement were hesitant on the outcome. Therefore, they slowed down their foreclosure proceedings which has created a backlog of foreclosure inventory now commonly known as “Shadow Inventory.” This shadow inventory can have a negative impact on the market, as the banks will now push forward with all the foreclosures they were previously idle on. When these properties hit the market we may see a surge in supply.

I don’t believe that the shadow inventory will hurt the real estate market on a broad, national level. However, I do believe there will be some markets where supply levels will be affected. These markets will mainly be in judicial states where the 5 banks primarily held off on foreclosures awaiting the settlement. This is where the largest backlog of foreclosures are.

Should this change your plans to buy?

I don’t believe it should change your plans to buy. I do, however, recommend buyers continue to proceed with caution and heavily analyze not only the property they’re buying but the inventory in the area. You want to continue to monitor the health of buildings where foreclosures and short sales are prevalent. If you are able to buy in a high qualify building for record low prices you’ll still be making the right decision by buying, all things being equal.

 

Paul Blackburn is an Illinois licensed Realtor and Associate Broker with @ Properties in Chicago. He can be reached at anytime via e-mail at Paul@PKBlackburn.com

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