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Foreclosure Fraud Settlement Update: Checks to Victims, Servicing Standards, Ongoing Lawsuits

A number of states have announced that they are sending out claim forms to foreclosure victims who are eligible for a one-time cash payment under the foreclosure fraud settlement. $1.5 billion has been earmarked for roughly 750,000 homeowners (depending on takeup) who were foreclosed upon between Jan. 1, 2008, and Dec. 31, 2011, by one of the Big Five servicers in the settlement (Bank of America, JPMorgan Chase, Wells Fargo, Citi and GMAC/Ally). The plan is to pay out the claims in mid-2013.

If this works and they get the target of 750,000 responses, then the payout will amount to $2,000 “sorry your home was stolen” checks. However, the challenge will come in actually finding these homeowners, who after all lost their home and experienced an upheaval in their lives. They may have left a forwarding address, and presumably that’s where these claim forms are being sent, but that doesn’t necessarily mean that the families still live there. Moreover, foreclosure victims may be wary of anything through the mail that has their old bank’s name on it and references their past foreclosure. Hopefully the packet doesn’t look like the bank going after them for a deficiency judgment.

Another element of the foreclosure fraud settlement kicking off in the next several weeks are the servicing standards:

After failing to adhere to at least two separate sets of servicing guidelines since 2010, lenders are preparing for more than 300 rules that take effect next month on loan modifications, fees, foreclosures, and the treatment of military personnel. For the first time, banks face a watchdog dedicated to keeping them honest, Joseph A. Smith, North Carolina’s ex- commissioner of banks.

The latest attempt by U.S. regulators to change the way the biggest mortgage servicers treat their customers will test how effective the $25 billion industry accord is in helping distressed homeowners. Previous guidelines, including those for the Home Affordable Modification Program, that required speedy responses for customers were ignored as banks lost paperwork or otherwise stalled applications, said Diane Thompson, an attorney at the National Consumer Law Center in Boston.

“They have had some of these rules in effect for years now, they just haven’t complied,” Thompson said. “Smith will be crucial in holding the servicers accountable; he has the power to take them to court if they’re in noncompliance. But whether that is enough remains to be seen.”

Smith has the ability to declare fines up to $1 million per violation and $5 million for repeated violations, and depending on how granular he wants to get, that could add up quickly. But Smith’s first report from the Office of Mortgage Settlement Oversight seemed designed to hype up how the banks engaged in consumer relief for borrowers, when mostly they just did short sales. So that didn’t inspire confidence.

Big banks are also in court in Massachusetts, under a lawsuit that was allowed to continue despite the settlement.

Seeking to have the remaining civil charges against them dismissed, five large national mortgage lenders and the Mortgage Electronic Registration System confronted state prosecutors in Suffolk Superior Court in Boston on Monday afternoon.

Prosecutors during a hearing argued that lenders Wells Fargo, Bank of America, JP Morgan Chase, Citibank and GMAC Mortgage, as well as MERS, should face state civil charges that they initiated foreclosures without actually holding the mortgages in question and that they corrupted land records by using MERS. Those charges were originally brought by state Attorney General Martha Coakley last December.

Some of these charges were dropped with the settlement, but prosecutors in Massachusetts continued to seek damages on other grounds. So we’ll see how that progresses.

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David Dayen

David Dayen