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Details released of $25 billion mortgage settlement

In a landmark settlement with big banks, the government has released more details about the $25 billion foreclosure abuse settlement plan. While the banks have agreed to no wrongdoing, the government has asserted that it will closely monitor that all parties involved follow the agreement.

Though mortgage fraud was not outright accused, the five major banks involved have been accused of pursuing faulty foreclosures and simultaneously foreclosing on borrowers who were negotiating mortgage modifications. The deal was filed in a Washington, D.C., court and still needs to be approved by a judge.

A big part of the agreement is loan modification, specifically for those whose mortgages are underwater, or worth more than the value of the home. However, the Association of Mortgage Investors has said that mortgage modifications or reductions could be financially harmful to investors in mortgage-backed securities. They have promised to intervene in court and ask that a cap be placed on modifications.

The deal should affect about 1 million homeowners over three years. The banks involved -- Bank of America, JP Morgan Chase, Citigroup, Wells Fargo and Ally Financial -- will not only restructure loans and reduce mortgage debts, they are also paying money to federal and state governments, some of which will go to borrowers who have already lost their homes to foreclosure.

In the new details available to the public, appropriately complicated math has come to light. Though the banks have three-and-a-half years to meet the terms of the agreement, there are incentives for them to get it done in the first year. Depending on their actions, banks will receive different credits toward their overall goal.

Thirty percent of the relief must be in the form of mortgage reductions for those who owe more than their homes are worth. To receive credit, banks must reduce debt for homes that are 175 percent underwater. If the bank does not own the loan, they will get 45 cents on the dollar toward their credit.

Source: Reuters, "Government details mortgage pact, promises tough oversight," Aruna Viswanatha and Rick Rothacker, Mar. 12, 2012

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