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Home - Top News
February 09, 2012 1:57 AM

California, New York Help Push Foreclosure Accord to Completion

Feb. 9 (Bloomberg) -- California and New York, along with Florida, agreed to join more than 40 other states in a nationwide settlement 16 months in the making that seeks to end abusive bank foreclosure practices that followed the collapse of the housing bubble, a person familiar with the matter said.

The decision by New York Attorney General Eric Schneiderman and California Attorney General Kamala Harris ensures the settlement has the backing of two officials who had been among the most outspoken in pushing for changes. The deal may be worth as much as $39 billion, according to the person, who declined to be identified because the terms haven't been made public.

'With California and New York signing on, it's a huge deal,' said Kurt Eggert, a professor at Chapman University School of Law in California who has been following the talks. 'California and New York were the biggest critics of this deal, so if they sign on, that's a sign that this is a real deal. It's not just a show.'

All 50 states announced 16 months ago that they were investigating bank foreclosure practices following disclosures that faulty documents were being used to seize homes. Officials from a group of state attorneys general offices and federal agencies, including the Justice Department, have since negotiated terms of a proposed settlement with Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co. and Ally Financial Inc.

Holdout States

Iowa Attorney General Tom Miller, who is helping to lead talks with the states, announced this week that more than 40 states had signed on to the settlement as of a Feb. 6 deadline. California, New York and Florida were among the holdouts, along with Nevada and Arizona.

California's refusal to sign threatened to undercut the significance of the agreement because it's the most populous state and has one of the highest foreclosure rates in the country.

The U.S. Department of Housing and Urban Development, which helped broker the deal, values the settlement at about $39 billion for all states, according to the person. Another person familiar with the agreement had previously said it was worth about $25 billion.

Wells Notices

Several banks received so-called Wells notices from the U.S. Securities and Exchange Commission, the Wall Street Journal reported yesterday, citing unnamed sources. The notices are issued when the SEC is considering bringing a claim, possibly including a lawsuit, against a company.

John Nester, an SEC spokesman, didn't immediately respond to an e-mail seeking comment after regular business hours yesterday on those notices.

The settlement will provide as much as $17 billion in loan principal reductions and other loan modifications for borrowers, according to a draft letter outlining the deal. Banks will also provide $3 billion in mortgage refinancing and pay $1.5 billion to about 750,000 borrowers who lost their homes to foreclosure, according to the letter.

The agreement, which will go into effect over a three-year period, requires the banks to report compliance to an outside monitor who will report to state attorneys general, according to the letter. Banks will pay 'heavy penalties' for failing to adhere to the settlement, according to the letter.

'Pay the Penalty'

'The real question is how much will they get that forces servicers to behave,' said Eggert, the law professor. 'What I want to see in this deal is real standards that bind the servicers and are monitored so if servicers act badly they have to pay the penalty.'

Shum Preston, a spokesman for Harris, didn't return phone or e-mail messages yesterday seeking comment on California joining the settlement. Dani Lever, a spokeswoman for Schneiderman, and Geoff Greenwood, a spokesman for Iowa's Miller, declined to comment.

Florida is working on final details and expects to sign on to the agreement, Jenn Meale, a spokeswoman for Attorney General Pam Bondi, said in a phone interview.

Bondi 'believes that we have reached a settlement that provides Floridians with much-needed relief and reforms the mortgage servicing industry,' Meale said in an e-mailed statement.

Besides New York, California and Florida, other states that hadn't signed on to the agreement as of the Feb. 6 deadline to decide were Nevada, Arizona, Massachusetts, and Delaware. Officials in Arizona and Delaware couldn't be reached for comment after regular business hours yesterday. Brad Puffer, a spokesman for Massachusetts Attorney General Martha Coakley, declined to comment yesterday.

Nevada Attorney General Catherine Cortez Masto was still reviewing terms of the proposed settlement, her spokeswoman, Jennifer Lopez, said yesterday in an e-mail.

Arizona, BofA

Arizona, which filed a consumer-fraud lawsuit against Bank of America in 2010, was negotiating a settlement with the bank to resolve the claims, a person familiar with that matter said. The foreclosure agreement with the five banks requires Arizona to release the claims if it joins the accord, said the person, who didn't want to be identified because the talks aren't public. If a settlement is reached with Bank of America, Arizona plans to join the foreclosure agreement, the person said.

Rick Simon, a spokesman for Charlotte, North Carolina-based Bank of America, didn't respond to an e-mail seeking comment on the talks with Arizona.

The scope of liability releases protecting banks from future litigation has been one of the biggest concerns for some attorneys general in the nationwide settlement talks, including Harris and Schneiderman, who started separate probes of mortgage operations of banks and had said the agreement shouldn't protect the lenders from claims that hadn't been investigated.

Obama's Pick

Schneiderman was selected by the Obama administration to help lead a joint state and federal group probing misconduct in the packaging and sale of residential mortgage-backed securities.

The settlement preserves any state and federal criminal claims, claims related to mortgage securitization, including those under New York's securities fraud statute, and fair lending laws, and claims brought by individual homeowners, among other matters, the first person familiar with the terms said.

MERS Lawsuit

The settlement with the five banks will allow Schneiderman to continue a lawsuit he filed against Bank of America, New York-based JPMorgan and San Francisco-based Wells Fargo over the use of a mortgage database called MERS, which he said led to improper foreclosures. The settlement preserves those claims and similar claims in the complaint that may be asserted against other banks, said the person familiar with the matter.

Bank of America, JPMorgan and Wells Fargo had demanded as a condition of the foreclosure agreement that New York drop many of the claims in the lawsuit, the person said.

Of the 20 U.S. metropolitan areas with the highest foreclosure rates in 2011, 10 were in California, according to RealtyTrac, which monitors foreclosure activity.

California had the third-highest foreclosure rate in the U.S. last year, behind Nevada and Arizona, RealtyTrac reported. One in every 31 homes, or 3.19 percent, was in some stage of foreclosure. California had almost 2 1/2 times as many foreclosure filings for housing units, 428,045, as the second- ranking state, Florida, which had 181,965.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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