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Underwater homeowner bailout considered with bank settlement

by Broderick Perkins

(10/20/2011) Erate Exclusive - Underwater homeowners may get a shot at a refinance and other financial assistance as part of a settlement negotiated by federal and state government agencies yanking banks for mortgage and foreclosure abuses.

The settlement could cost banks $25 billion, and give them some relief from potential state civil lawsuits, in exchange for refinancing certain loans, according to reports from the Wall Street Journal, Reuters and other media outlets.

It's not clear how many homeowners would qualify under the proposed plan.

Loans eligible would be bank-owned loans held by creditworthy mortgage holders who've remained current on mortgages, but have balances higher than the value of their home.

Most mortgages are held by investors. Only an estimated 20 percent of all mortgages are bank owned and underwater mortgage holders generally have a tough time refinancing.

CoreLogic estimates 22.5 percent of all residential properties with a mortgage -- nearly 11 million -- are underwater, according to data from CoreLogic.

Parties in the year-long dispute floated the refinance carrot as part of the settlement to get California Attorney General Kamala Harris back to the table.

She walked after complaining previously proposed settlements offered too little relief for Californians. California has an estimated 2 million underwater homeowners and that brings a lot of clout to the table.

Banks, facing other suits, have been holding out on a multi-billion-dollar settlement hoping for more favorable terms than state attorneys general were prepared to offer for banking abuses including "robo-signing," forging, using fake names and otherwise falsifying foreclosure documents, and "dual-tracking," foreclosing on mortgages up for modification.

The refinance plan has been floated because underwater mortgages often become foreclosures that add to the clogged housing pipeline. Some underwater homeowners elect "strategic default," and stop paying their mortgage either to walk away from the debt or to trigger mortgage help from banks or the government.

Most homeowner bailout programs target delinquent homeowners, rather than those who pay or time -- even if their mortgage is larger than the value of their home.

The battle is being waged by many states and several federal agencies against Bank of America Corp , JPMorgan Chase & Co , Wells Fargo , Citigroup , and Ally Financial, some of the same banks that earlier received taxpayer bailout money.

The $25 billion settlement also includes banks helping troubled borrowers with an array of options including transition-to-rentals cash, principal write-downs, and other assistance.

The deal isn't a certainty as talks continue this week.

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Underwater homeowner bailout considered with bank settlement

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