Earlier in 2012, the federal government and the attorneys general from 49 states reached an agreement with the five largest loan servicers in the U.S. to provide financial relief to millions of distressed mortgage borrowers.

The banks that agreed to the national mortgage settlement — Ally/GMAC, Bank of America, Citi, JP Morgan Chase, and Wells Fargo — will pay up to $26 billion to victims of foreclosure abuses that occurred following the housing bust. These abuses included failure to verify foreclosure documents, signing documents without reading or understanding them, and using fake signatures to speed up the foreclosure process (known as “robo-signing”).

The Nuts and Bolts

Borrowers whose loans are owned or serviced by a private lender may be eligible to receive proceeds from the settlement. Specifically, up to 750,000 borrowers who were victims of abusive foreclosure practices will receive a total of $1.5 billion, or approximately $2,000 each. There will be no requirement to prove financial harm, nor will borrowers have to release private claims against the loan servicers.

In addition, borrowers who are current on their mortgage payments but who owe more on their mortgage than their home is currently worth (i.e., borrowers with “underwater loans”) may be able to refinance their mortgage at a lower interest rate. The loan servicers must provide up to $3 billion in refinancing relief to these borrowers.

However, the majority of the settlement — about $17 billion — will go toward reducing the loan principle for underwater borrowers through loan modifications. These modifications will include principal reductions in both first and second liens. It’s estimated that about one million underwater homeowners will see loan principal reductions averaging about $20,000.

Additionally, the settlement requires that banks now make foreclosure a last resort. Also, lenders may not foreclose on homeowners who are being considered for a loan modification.

Are You Eligible for Relief?

If you lost your home through foreclosure and believe that you were a victim of abusive mortgage foreclosure practices, or if you are currently underwater on your mortgage, you may be wondering if you’re eligible to receive any relief from the settlement. Unfortunately, it is impossible to know the answer for sure right now because of the complexity of the mortgage market and the agreement itself.

The settlement will be put into effect by the loan servicers over the next three years, during which time it will become more clear exactly who is and is not eligible to receive relief. In the meantime, here are a few guidelines to help you determine whether or not you might be eligible:

  • In order to be eligible for the one-time cash payment, your home must have been foreclosed on between January 1, 2008, and December 31, 2011.
  • If your mortgage is owned by Fannie Mae or Freddie Mac, you will not be eligible for relief. Mortgages owned by these government-controlled mortgages companies (about half of all mortgages in the U.S.) are not affected by the settlement. To determine if your mortgage is owned by Fannie Mae or Freddie Mac, visit http://www.fanniemae.com/loanlookup or http://www.freddiemac.com/mymortgage.
  • If you live in Oklahoma, you will not be eligible for relief. Oklahoma was the only state not to participate in the settlement.

What Happens When?

Over the next six to nine months, the settlement administrator, state attorneys general and the mortgage servicers will begin identifying homeowners who are eligible for a one-time cash payment, a mortgage principal reduction, or a loan refinancing. Homeowners who are eligible will receive letters in the mail informing them of such.

If you lost your home to foreclosure between 2008 and 2011 and are eligible for cash restitution, you will receive a claim form in the mail from a settlement administrator. If you’re eligible for a loan modification or a refinance, you may be contacted by one of the five participating loan servicers.

For more details on the national mortgage settlement, visit http://www.nationalmortgagesettlement.com. In addition, you can contact the five participating loan servicers by phone at:

  • Ally/GMAC: 800-766-4622
  • Bank of America: 877-488-7814
  • Citi: 866-272-4749
  • JP Morgan Chase: 866-372-6901
  • Wells Fargo: 800-288-3212