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Will $26 billion settlement from big banks repair US housing market? (+video)

In the short term, the deal between 49 states and five big banks may actually boost foreclosures, some say. In the longer term, it should clear the inventory of homes that depresses prices and help the middle class.

By Ron SchererStaff writer / February 9, 2012

A foreclosed home is shown on Pine Island in Lee County, Fla., in this photo from 2010.

Chris O'Meara/AP/File

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New York

In a historic settlement, five of America’s largest banks have agreed to pay $26 billion to settle a lawsuit charging poor servicing of mortgages as they went bad and illegal use of automatic signature devices on legal documents for the years 2008-11.

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The settlement of the lawsuit, brought by states’ attorneys general in 2010, means many individuals in the midst of foreclosure proceedings will see the principal they owe on their mortgages shrink by as much as $20,000, reducing their monthly payments. The share of the settlement the banks will commit for principal reduction for struggling homeowners is $17 billion.

In addition, the banks agree to give individuals who have lost their jobs a one-year grace period to find a new job before beginning foreclosure proceedings. They also designated $3 billion of the overall settlement to help homeowners refinance their loans at a 5.25 percent interest rate. Some 750,000 people who have already lost their homes may get a check for $1,800 as compensation for the banks’ behavior.

“This is a vindication for all consumers who experienced poor servicing of their mortgages or wrongful foreclosure,” says David Berenbaum, chief program officer at the Washington-based National Community Reinvestment Coalition, which tries to increase bank services in low- and middle-income communities. “This agreement is also likely to be the basis for national standards set by the new Consumer Finance Protection Bureau.”

A key aspect of the agreement is that the banks will modify not only first mortgages but also second mortgages, says Mr. Berenbaum. “This will help people to keep their homes,” he says, because often borrowers could not get both mortgages modified.

The agreement is being compared with the tobacco settlement in 1998. States' attorneys general had sued the tobacco industry, which agreed to pay the states $105 billion for past infringements in return for ending the lawsuits. The industry also agreed to change its marketing and advertising policies.

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