What the Big Banks’ Mortgage Settlement Means for Homeowners

If you’ve been following the news in recent days, you may be aware that many of the nation’s largest banks have reached an agreement with the government to help certain homeowners. This agreement offers approximately $25 Billion in relief for certain homeowners, including:

– Borrowers from the 49 states that signed on to the settlement, except Oklahoma. (Oklahoma reached a separate settlement with the banks worth $18.6 million. If you live in Oklahoma, you will not be entitled to the $25 billion deal.)

– Borrowers who had their houses foreclosed on them from January 1, 2008 to December 31, 2011.

– Borrowers who took out a mortgage with one of the following banks: Citibank, JP Morgan Chase, Wells Fargo, Bank of America, or Ally Financial (formerly known as GMAC). No other banks, mortgage servicers or government sponsored entities (Freddie Mac or Fannie Mae) are eligible.

– Borrowers who are in the process of being foreclosed on and borrowers whose house is worth less than the amount of their mortgage, otherwise known as “underwater” mortgages.

What home owners can expect.

For homeowners needing loan modifications now, including first and second lien principal reduction and borrowers who are late on their first or second mortgage payments by over 90 days and who are at risk of being foreclosed on, the banks are required to work with you in good faith to lower the principal of your loan, so you can afford your payments. The principal is defined as the value of your loan, not the market value of your house. They will also work with you in trying to modify the terms of your loan (changing interest rates, changing payment schedules, creating new minimum payments and creating bespoke payment plans) so that you can keep your house. The settlement sets aside $17 billion for these borrowers.

For borrowers who are current on payments, but “underwater,” (this includes borrowers who haven’t missed a payment, but whose house is worth less today than the value of their mortgage), the banks will work with them to refinance their loans at today’s historically low interest rates. That means the banks will change the current interest rate you pay on your loan (say, 8%), to somewhere around between 3% and 4%, depending on your credit score. This will lower your payments, which takes the sting out of having to pay down a mortgage that is worth more than your house. The settlement sets aside $3 billion for these borrowers.

Finally, for borrowers who lost their homes due to foreclosure, an estimated 750,000 homeowners between January 1, 2008 to December 31, 2011, they are entitled to split $1.5 billion of the settlement.

Don’t call us, we’ll call you.

The bank and the government will decide who is ultimately entitled to receiving restitution. If you are selected, you will receive a letter in the mail with instructions on how to proceed.

I know I am eligible, when do I get my cash/help?

You better be sitting down for this. Apparently it will take up to THREE years for everyone to be paid out and it will take the government up to two months to pick an administrator. Then, it will take six to nine months to identify who might be eligible. After this process is complete, qualifying persons will be notified by mail.

Where can I find out more info?

There is already a website dedicated to this process. There are also a host of rule changes that go in effect to protect borrowers who are in the foreclosure process. You can check them out here.

Cyrus Sanati is a frelance financial journalist whose work has appeared in dozens of leading publications, including The New York Times, BreakingViews.com, and WSJ.com. Follow Cyrus on Twitter @csanati.