Banks step up efforts to forgive mortgage debt in California

Banks are stepping up efforts to forgive mortgage debt for troubled California homeowners, although more than half of the aid offered under last year’s landmark mortgage settlement is still geared toward getting people out of their homes.

California homeowners have received an estimated $16.9 billion worth of completed aid doled out by the nation’s five largest mortgage servicers under the accord reached last year. In the most detailed report to date on how that money is flowing to borrowers, regulators noted an increase in the number of principal reductions, although the single biggest chunk of aid has been short sales.

In principal reductions, banks write down mortgage debt for borrowers who remain in their homes. Short sales allow homeowners to sell their properties for less than they owe. Both require banks to take a haircut.

Nationally, more than half a million consumers had received a total of $45.8 billion in aid from the five largest banks as of Dec. 31. The settlement was struck last year by 49 state attorneys general, several federal agencies and Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc.

Officials had first estimated that the banks would provide $34 billion in direct homeowner aid through their programs. Housing and Urban Development Secretary Shaun Donovan said Thursday that he now expects the final amount will be more than $50 billion.

The settlement resolved investigations into allegations that the financial institutions had used flawed paperwork and other faulty practices to foreclose on homes.

Before the settlement, many lenders opposed principal write-downs, arguing that they rewarded delinquent borrowers. But consumer advocates have long pushed for wide-scale principal relief.

“Clearly there is some added momentum around principal reduction modifications, and that is encouraging,” said Paul Leonard, California director for the Center for Responsible Lending. “But, you know, you look at the overall data and see a disproportionate share of short sales, which is disappointing.”

HUD Secretary Donovan told reporters that the settlement was exceeding its goals. The accord has kept people from losing their homes and contributed to the housing recovery, he said.

Under the settlement, banks are required to give homeowners aid in the form of principal reduction, short sales and other modifications. The banks get credit for both principal reductions and short sales under the agreement, but must give 60% of the relief nationally by forgiving principal for families who keep their homes.

Of the $45.8 billion in aid dispensed nationally, homeowners have received about $10.9 billion in first-mortgage principal reduction relief, including trial modifications that are expected to become permanent. Meanwhile, about $20 billion of the total national aid came from short sales. The rest has gone to reducing and forgiving second mortgages, as well as other programs.

According to numbers provided by California’s monitor, a total of $16.9 billion worth of aid has gone to homeowners. About $5 billion of that total is first-mortgage principal reduction. About $8.8 billion has been through short sales.

Although short sales remain a big part of the equation, borrowers are getting more principal relief in California than in other states in part because of the state’s tough new foreclosure laws, the state attorney general’s office said.

So far only Ally Financial, which has provided $257 million in relief, has met its obligation under the national settlement. The other four banks had much larger obligations.

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