It was the dirty secret of the housing bust: a wave of foreclosures that threatened to force people out of their homes even as the paperwork involved was shoddy, incomplete or processed without proper review.
To pay for such mistakes, a group of 10 U.S. banks has agreed to a settlement with regulators worth $8.5-billion (U.S.).
The deal, announced Monday, is a fresh attempt by the U.S. government to mend the damage caused by the housing collapse in a way that penalizes banks for bad behaviour and channels aid to homeowners.
The extent of the damage suffered in the housing market was underlined by a separate settlement, also announced Monday, between Bank of America Corp. and Fannie Mae. The agreement, worth $11.7-billion, will resolve claims that the bank funneled faulty home loans to the government-owned mortgage giant during the housing boom.
Monday's announcements are the latest in a sequence of settlements seeking to put a price tag on banks' misconduct in the years surrounding the financial crisis. In many cases, regulators have extracted monetary settlements, but do not target individual executives, nor do they pursue criminal prosecutions.
The problems with home foreclosures burst into public view in late 2010. The revelations included the fact that key papers used in foreclosures had been falsified or certified by "robo-signers" – employees who signed off on hundreds of documents a day, making it impossible to confirm whether the information they contained was accurate.
The deal to resolve the foreclosure abuses comes in two parts:
The 10 lenders will pay $3.3-billion in cash to borrowers but provide other assistance, like loan modifications, worth $5.2-billion. The list of banks involved includes JPMorgan Chase & Co.,Citigroup Inc.,Wells Fargo & Co., and Bank of America.
The agreement will replace a process under way since last year, where regulators had mandated that banks hire independent consultants to review foreclosures on a case-by-case basis. That approach was moving too slowly, regulators said, and aid wasn't reaching homeowners.
"Our new course of action will get more money to more people more quickly, and it will speed recovery in the nation's housing markets," Thomas Curry, the Comptroller of the Currency, one of the regulators involved in the settlement, said in a statement.
Depending on the type of error the bank made, borrowers could receive anywhere from a few hundred dollars up to $125,000. The agreement covers 3.8 million borrowers whose homes were in foreclosure in 2009 and 2010.
Critics said the amount the banks are paying, spread across so many borrowers, is paltry. The "pool of cash payments is wholly inadequate in light of the scale of the harm," Alys Cohen, staff attorney for the National Consumer Law Center, said in a statement.
At least one lawmaker also expressed unease. "I have serious concerns that this settlement may allow banks to skirt what they owe and sweep past abuses under the rug without determining the full harm borrowers have suffered," Elijah Cummings, a Democratic representative from Maryland, said in a statement.
The defects in the foreclosure process sparked official probes by all 50 states and, in early 2012, five large banks agreed to a broad $25-billion settlement with federal and state authorities to help struggling homeowners. That deal set aside $1.5-billion for borrowers evicted between 2008 and 2011, translating into a payment of roughly $2,000 each.
Thomas Ice, an attorney in Florida who represents homeowners in foreclosure cases, said that previous attempts to assist borrowers have had little to no concrete impact on his clients. His firm currently has 700 foreclosure cases before the courts.
The positive effect of last year's joint federal-state settlement, Mr. Ice said, has been to educate court personnel. Unlike in the past, judges are "looking a bit more askance at the paperwork and not assuming it's all true just because the bank says it is."