Homeowners Receive $25 Billion Mortgage Settlement, But Is It Enough?

If you think you've got some money coming to you, don't get too excited yet.

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About one million distressed homeowners are expected to receive mortgage relief in the form of a major settlement on behalf of big banks. In what is the largest attempt to aid the U.S. housing crisis to date, the government will be collecting approximately $25 billion from Bank of America, Wells Fargo, JPMorgan Chase, Citigroup, and Ally Financial, and putting it in the hands of struggling mortgage holders.

Reason for the Settlement. It all started in late 2010 when major mortgage servicers came under investigation for filing the documents necessary to begin the foreclosure process without following proper protocol. Banks were found guilty of signing off on foreclosures without reviewing them on a case-by-case basis and without the presence of a notary public, in order to speed up the process in what is now known as the robo-signing scandal.

[See 50 Ways to Improve Your Finances in 2012.]

The banks involved in robo-signing not only routinely broke the law, but were responsible for evicting thousands of homeowners on the basis of incorrect or invalid documentation, prompting a months-long freeze on all foreclosure proceedings in the nation and undoubtedly worsening the already dire U.S. housing situation.

Well, it's finally time for the banks to pay--to the tune of $25 billion--but many question whether the settlement is really enough to aid homeowners or penalize banks.

Who Is Eligible for Relief?

Details regarding who, exactly, will be granted settlement funds are not finalized, but NationalMortgageSettlement.com breaks down how the money will be allocated:

• $17 billion--principal reductions: Homeowners who are underwater and delinquent/at risk of default on their mortgages as of the settlement date are to have the total principal owed on their loans reduced, for a total savings of up to $17 billion.

• $3 billion--refinancing: Those who are currently paying a high mortgage rate or have an adjustable-rate mortgage that's about to reset can refinance to today's rock-bottom rates, putting lenders at an estimated loss of $3 billion in interest.

• $1.5 billion--cash payments: The 750,000 qualifying homeowners who lost their homes to foreclosure between 2008 and 2011 can expect to receive a $2,000 check.

[See 6 Strategies for Dealing With an Underwater Mortgage.]

The remainder of the settlement will go toward funding efforts such as consumer-protection programs and reforms to servicing standards.

If you think you've got some money coming to you, don't get too excited yet. The next 30 to 60 days will be spent simply selecting an administrator tasked with ironing out the details and enforcing payment. Then it will take an additional six to nine months to determine which homeowners are to be compensated.

Finally, the settlement will be executed over the next three years.

Is It Enough?

Federal officials hope to bump up the total relief dollars to $39 billion, but the question of whether this settlement will be large enough to provide true relief can only be answered with a disappointing "it depends" for now.

Paul Dales, a housing economist with Capital Economics, tells MSN, "You’re hardly skimming the surface. It could help some people a lot, individually. But in terms of the big-picture, overall economy and housing market, it’s really just a drop in the ocean of the problem." Only the five banks mentioned above (and all states but Oklahoma) have agreed to the settlement, while mortgages funded by Fannie Mae and Freddie Mac are exempt. That cuts more than half of homeowners from eligibility right off the bat.

[See The Future of Fannie Mae and Freddie Mac.]

The New York Times explains that the formula by which homeowners will be compensated is far from simple, although banks will be incentivized to help borrowers with the most severely underwater mortgages first.

Slap on the Wrist for Banks

While the numbers appear impressive at first glance, most experts agree that $25 billion will do little more than put a dent in the total funds needed to pull the U.S. housing market out of its hole. And when it comes to holding banks accountable for the mess they caused, the numbers fall short again. Much of the relief funds going to homeowners will be in the form of "soft dollars," with banks paying out very little cold, hard cash.

Then there's the matter of enforcement. As Matt Taibbi of Rolling Stone explains:

"With the rest of it--collecting on the settlement, enforcement of the decrees, all the stuff put in there to balance the deal in the consumer's direction--there will be an uphill battle from this point forward to get the banks to comply. The banks meanwhile have no such uphill battle. They will get the full benefit of the deal (a release from costly litigation) from the moment the ink is dry."

However, while many are pointing out the flaws in this plan--namely, that it probably isn't enough money to make an impact on the current state of the housing market, or punish the mortgage servicers who have prolonged the housing crisis--those actually in danger of losing their homes due to unaffordable mortgage payments will likely agree that it's better than no help at all.

Casey Bond is editor-in-chief of www.GoBankingRates.com, which provides readers informative personal finance and investing content, as well as the best interest rates on financial services nationwide.