National Mortgage Settlement

National Mortgage Settlement
Name	National Mortgage Settlement
Date	2012
Parties	State attorneys general; five largest mortgage servicers
Location	United States
Outcome	Foreclosure relief, loan modifications, payments

National Mortgage Settlement The National Mortgage Settlement was a 2012 agreement among state Attorney Generals, major mortgage servicers, and federal entities that resolved claims arising from foreclosure practices during the Great Recession and the Subprime mortgage crisis. The settlement allocated relief through principal reductions, loan modifications, and cash payments to state and federal programs, and it affected litigation involving the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, Bank of America, JPMorgan Chase, and other financial institutions.

Background

During the housing collapse following the 2007–2008 financial crisis and the Subprime mortgage crisis, allegations emerged against servicers such as Wells Fargo, Citigroup, GMAC/Ally Financial, PNC Financial Services, and Deutsche Bank for flawed foreclosure procedures, including robo-signing and deficient documentation. State Attorney Generals led multi-state investigations coordinated with federal entities like the Department of Justice, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau. Litigation intersected with actions by the Securities and Exchange Commission and lawsuits involving investors such as Pension Benefit Guaranty Corporation beneficiaries, trustees for mortgage-backed securities from issuers like Bear Stearns and Lehman Brothers, and foreclosure trustees across states including California, New York (state), Florida, Ohio, and Illinois.

Terms of the Settlement

The agreement required the five largest mortgage servicers—Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial—to provide homeowner relief, including principal reductions, loan modifications, and short sales. The settlement created payment obligations to state attorneys general and federal entities such as the Department of Housing and Urban Development and the Federal Deposit Insurance Corporation, with allocation formulas involving affected states like Michigan, Texas, Pennsylvania, Georgia, and North Carolina. The terms addressed servicing standards and foreclosure review protocols tied to documents prepared by firms such as Sullivan & Cromwell and Kirkland & Ellis retained by servicers, and incorporated monitoring by independent auditors and overseers, including organizations tied to House Financial Services Committee inquiries and oversight by state courts in jurisdictions like Massachusetts and New Jersey.

Implementation and Enforcement

Implementation involved state Attorney General offices, servicer compliance departments, and oversight by monitors and independent consultants with experience from firms like PricewaterhouseCoopers, Ernst & Young, and KPMG. Enforcement mechanisms relied on consent judgments filed in state courts and coordination with federal agencies such as the Federal Reserve Board and the Office of Thrift Supervision successor entities. Compliance reporting was reviewed by state officials and affected servicers faced escalated remedies, including additional payments and injunctive relief enforceable in venues like U.S. District Court for the Southern District of New York and state supreme courts. Bankruptcy trustees and mortgage-backed securities trustees under law firms such as Proskauer Rose sometimes intervened or filed related claims.

Impact and Outcomes

The settlement produced principal reductions for borrowers, modified loans for homeowners in states including California, Arizona, and Nevada, and led to direct payments to state funds and foreclosure mitigation programs administered by agencies like state housing finance agencies and nonprofit partners such as NeighborWorks America and National Community Reinvestment Coalition. Outcomes were analyzed in reports by research institutions including the Urban Institute, Harvard Joint Center for Housing Studies, and academic authors from Yale University and Columbia University. The settlement influenced policy debates in Congress, including hearings before the Senate Banking Committee and the House Oversight and Government Reform Committee, and intersected with mortgage servicing rulemakings by the Consumer Financial Protection Bureau.

Criticisms and Legal Challenges

Critics included state attorneys general from jurisdictions such as Pennsylvania and Mississippi who argued about allocation formulas and perceived shortcomings in borrower relief. Private litigants, investors represented by firms like Skadden, Arps, Slate, Meagher & Flom and Latham & Watkins, and consumer advocates including Public Citizen challenged aspects via lawsuits in courts such as the U.S. Court of Appeals for the Second Circuit and state appellate courts. Commentators at think tanks like the Cato Institute and Brookings Institution debated whether the settlement provided adequate deterrence for institutions including Goldman Sachs and Morgan Stanley and whether consent decrees impaired ongoing enforcement by the Department of Justice.

State and Industry Responses

State responses varied, with some attorneys general, including those from California, New York (state), and Massachusetts, endorsing the agreement while others pursued separate enforcement actions or negotiated bilateral settlements with servicers such as Wells Fargo and Bank of America. Industry reactions ranged from statements by trade groups like the American Bankers Association to operational changes within servicers' loss mitigation units and coordination with servicer trade associations including the Mortgage Bankers Association. Subsequent regulatory reforms influenced servicer behavior, regulatory examinations by the Office of the Comptroller of the Currency, and oversight by state banking departments such as the New York State Department of Financial Services and California Department of Business Oversight.

Category:Mortgage law and regulation