The majority of the settlement money, $17 billion, will be used to provide direct assistance to homeowners. Of that figure, at least 60 percent must be used to write down principal on underwater loans. HUD Secretary Shaun Donovan expects that this money could ultimately result in $35-40 billion of principal reductions, since servicers will not receive a dollar of credit towards fulfilling settlement responsibilities for every dollar of principal written down—servicers will likely receive 50 cents or less credit for every dollar written down. Negative equity has been shown to be a principal driver of foreclosure, and Illinoisans have lost billions of dollars in wealth due to plummeting home values. Approximately 380,000 homeowners in the Chicago region are underwater, with another 78,000 dangerously close to losing all of their equity. Woodstock estimates that the average underwater borrower in the Chicago region owes about $61,000 more than the value of his or her home. The rest of the homeowner assistance money will be put toward programs for short sales, forbearance for unemployed programs, waiving deficiency balances, stabilizing vacant homes, and other purposes.
At least $3 billion of the settlement will be put toward refinancing loans that are current but are underwater and have an interest rate of 5.25% or more. Monthly payments must be reduced by at least $100.
Servicers also agreed to a set of standards to improve their loan servicing operations. Servicers agreed to put the brakes on the “dual track” of simultaneously pursuing both a loan modification and a foreclosure on the same home. Under the settlement, servicers will be required to consider a borrower for a loan modification before initiating a foreclosure, increasing the chances of saving his or her home. Borrowers will also have the right to appeal a modification decision, which is crucial when servicers have been shown to have widespread problems with losing important documentation or incorrectly determining eligibility. Other changes to servicing procedures include:
• Improving communications with borrowers by requiring a notice of intention to proceed to foreclosure before foreclosure is initiated that informs borrowers of their rights to remain in the home until foreclosure is completed and explains the servicer’s right to foreclose, appointing a single point of contact for each borrower, informing borrowers of all foreclosure prevention options before foreclosure is filed, requiring timely responses to loan modification applications and other requests, creating an online portal so borrowers can track their modification status, and providing contact information of housing counselors to the borrower.
• Increasing thoroughness in preparation of foreclosure documents.
• Improving oversight of third parties involved in the foreclosure process.
• Requiring that servicers notify the borrower and local authorities when they decide not to complete a foreclosure on a property, a phenomenon documented in Woodstock Institute’s report “Left Behind: Troubled Foreclosed Properties and Servicer Accountability in Chicago.”
• Requiring that servicers have a sufficient number of adequately trained personnel to handle loss mitigation workloads in a timely and thorough manner.
• Improving transparency for proprietary modifications.
• Ensuring that servicing fees are reasonable and that late fees do not accrue during a trial modification.
• Enhancing protections for military service members in foreclosure.
• Enhancing participation in neighborhood stabilization programs, such as land banks.