State attorneys general from every state in the union other than Oklahoma have signed on to a $26 billion settlement with five big mortgage lenders over 2010’s robo-signing scandal. The majority of the settlement, which includes Chase, Bank of America, Wells Fargo, Ally Financial, and Citigroup, will go towards helping underwater homeowners reduce principal, while a smaller amount will go towards refinancing mortgages. The remainder will be paid out to victims of foreclosure as small cash settlements.

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Now, $26 billion is an almost unimaginable sum of money, but the consensus among experts seems to be that the settlement is a necessary step toward moving past the housing crisis, but it won’t completely fix the problem. In all, the banks were only fined $5 billion in hard cash, the rest of the settlement is soft money — write-downs, refinancings and the like.

When considering the scale of the settlement, however it’s important to keep in mind that the federal probe was concerned with robo-signing, and not the foreclosure crisis and housing bubble itself.

Some $7 trillion in equity vanished in the 2008 market correction, but the settlement isn’t about that. What happened today is that banks are being held accountable for fabricating documents to foreclose on homes as quickly as they could, while home values plummeted. That may not undo the pain and mistakes of 2008 …. but perhaps nothing can.

The Breakdown

According to a Department of Justice press release on the matter, $10 billion from the settlement will go toward principal reduction for homeowners who are close to default; $3 billion will go towards refinancing current, but underwater loans; and $7 billion will go toward”other forms of relief, including forbearance of principal for unemployed borrowers, anti-blight programs [and] short sales.”

The hard money part of the settlement will be $5 billion — $3.5 billion to be paid to state and federal governments for costs associated with improper foreclosures and $1.5 billion to be paid to homeowners whose homes were foreclosed on between Jan. 1, 2008, and Dec. 31, 2011. According to the New York Times, homeowners who lost their homes in foreclosure should expect checks of about $2,000. The Wall Street Journal estimates payments of $1,500.

An additional $1 billion will be paid directly from Bank of America to the Federal Housing Administration for Countrywide’s alleged inflation of appraisal prices on FHA-insured loans. Countrywide was purchased by BofA in 2008.

Is it Enough?

As for the homeowners getting principal reductions, the New York Times estimates that the amount will be about $20,000 on average. One in five homes in the United States is underwater, according to the Times, with total negative equity of $700 billion — a problem that $17 billion in write-downs simply cannot solve.

While the settlement allows banks to reduce the number of troubled assets on their books while alleviating uncertainty, the robo-signing scandal is not necessarily over. The DOJ’s press release states that the agreement “does not prevent state and federal authorities from pursuing criminal enforcement actions related to this or other conduct by the servicers,” meaning that New York Attorney General Eric Schneiderman is still free to pursue his suit against lenders for using MERS, and California Attorney General Kamala Harris can go forward with her own suit.

Banks will be expected to pay out their penalties during the next three years, and they must be done paying for 75 percent of their settlement within the first two. The DOJ has created incentives for banks to respond within the first 12 months as well.

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