Forty-nine states, every one but Oklahoma, as well as federal regulators will participate in a foreclosure fraud settlement that will release the five biggest banks (Wells Fargo, Citi, Ally/GMAC, JPMorgan Chase and Bank of America) and their mortgage servicing units from liability for robo-signing and other forms of servicer abuse, in exchange for $25 billion in funding for legal aid, refinancing, short sales, restitution for wrongful foreclosures and principal reduction for underwater borrowers. The announcement will be made on Thursday.

This settlement arises from multiple abuses found in the servicing of loans and the foreclosure process over the past several years. At the height of the housing bubble, banks sliced and diced mortgages and traded them with little regard for the rules following land recording or securitization to such a sloppy extent that they lost track of the true owner on potentially millions of homes. To cover up for this massive failure, banks and their servicing units have been found to have routinely forged, back-dated and fabricated documents at county recorder offices and state courts across the country. Furthermore, they employed “robo-signers,” who signed hundreds of thousands (if not millions) of documents and affidavits without any knowledge of the underlying mortgages. In addition, investigations uncovered massive servicing abuses, including illegal fees charged to borrowers, putting borrowers into foreclosure at the same time as they were working out loan modifications, failing to honor previous settlements where promises were made on modifications, and countless other errors that maximized servicer profits and gouged homeowners. There are also cases of wrongful foreclosures where homeowners have been turned out of their homes without just cause, and servicer-driven foreclosures, where servicers illegally added late fees and applied payments inaccurately, pushing the homeowner into foreclosure. This is but a smattering of the examples of foreclosure fraud and servicer abuse found in a series of interlocking investigations, court depositions, reviews of documents in registers of deeds offices, and homeowner testimonials.

The deal caps a 16-month process that had several fits and starts, and closed with the final holdouts, New York and California, coming to terms. The deal will release claims from state Attorneys General, but individual homeowners retain private rights of action to sue over foreclosure fraud and other abuses. As part of the settlement, states will get a fixed amount in hard dollars that would go to fund legal aid services. “This will get a lawyer for everyone facing foreclosure in the state,” said one source in an Attorney General’s office. “This will stop every wrongful foreclosure.”

Oklahoma stayed out of the deal because the state’s Attorney General, Scott Pruitt, did not believe that the banks should face any penalty.

As far as the release goes, AG offices that signed onto the lawsuit claimed it was narrowly crafted to only affected foreclosure fraud, robo-signing and servicing (which I don’t feel is all that narrow, but I’m trying to just-the-facts this -ed). The lawsuit that New York AG Eric Schneiderman filed last Friday, suing MERS and three banks for their use of MERS, was preserved fully. There was a last-minute request by the banks to dissolve that lawsuit, but it was not successful. In addition, Schneiderman reserves the right to sue other servicers for their use of MERS along the same lines as the current lawsuit.

In addition, all securitization claims, tax fraud claims, insurance fraud claims, and more will be able to be investigated and prosecuted by individual AGs and the RMBS working group, set up at the Financial Fraud Task Force, with Schneiderman as one of five co-chairs. They will be able to use all findings gathered in multiple investigations into servicing and foreclosures in their investigation. At least one of those investigations, the HUD Inspector General report, will be made public as part of the settlement. That report, according to a senior Administration official, will show a wide variety of errors among the major servicers, but the worst will show up to a 60% error rate. In one incident described in the report, an employee of one of the servicers spent two weeks experimenting with her staff to see how long it would take to process foreclosure documents correctly. They determined it would have taken at least 1-2 weeks. This employee went to their manager and reported the information. The following week, the manager told the employee they were reducing the time spent on each file from 48 to 24 hours.

This is the kind of conduct that will be released in the settlement.

Other lawsuits, like Delaware AG Beau Biden’s lawsuit against MERS, Missouri AG Chris Koster’s criminal indictments against DocX, and Nevada AG Catherine Cortez Masto’s suit against LPS and its employees would be able to go forward as well because the banks are not a party to them. However, it’s unclear whether any of those AGs will be able to work their way up the chain to indict bank officers for the same conduct; the likely answer, I assume, would be no. In California, Kamala Harris preserved the right for state officials and large pension funds to sue under the state’s False Claims Act over mortgage backed securities that later fell in value.

The status of Massachusetts AG Martha Coakley’s suit against five banks for foreclosure fraud is unknown. In all likelihood, the Nevada/Arizona suit against Bank of America for failing to follow their responsibilities in the Countrywide settlement will be folded into the deal.

In that settlement, BofA promised to deliver $8.5 billion in relief for Countrywide borrowers who fell victim to deceptive practices in the mortgage process. In reality, only $236 million was ever spent. Weak settlement terms allowed BofA to take credit merely for offering loan modifications to borrowers. And the Nevada suit alleged that BofA immediately started abusing borrowers who tried to get relief under the deal. But that suit is now gone.

State and federal regulators insist that they learned their lesson with that botched settlement and that this one has tight enforcement guidelines. A federal monitor, North Carolina banking commissioner Joseph Smith, will be employed, and he will have oversight responsibilities over the settlement. However, the monitoring process begins with a self-assessment from the banks through quarterly reports, which Smith and a committee can then review. This enforcement process is likely to take months to actually properly assess the settlement.

And then there’s the settlement price: $25 billion, divided up several ways. $3 billion will go toward refinancing for current borrowers who are underwater on their loans, as well as short sales. $5 billion will go as a hard cash penalty to the states, which can use them for legal aid services, foreclosure mitigation programs, and ongoing fraud investigations in other areas (one official close to the talks feared that much of that hard cash payout will go in some Republican states toward filling their budget holes). The federal government will get a cash penalty as well. Out of that $5 billion, up to 750,000 borrowers wrongfully foreclosed upon will get a $1,800-$2,000 check if they sign up for it, the equivalent of saying to them “sorry we stole your home, here’s two months rent.”

The bulk of the money, around $17 billion, will go to principal reduction credits for troubled borrowers. The banks will not get dollar-for-dollar credit for every write-down; reductions on loans bundled in private-label mortgage-backed securities, for example, will be under 50 cents on the dollar, and write-downs for second liens (mostly home equity lines of credit) will be more like 10 cents. Housing and Urban Development Secretary Shaun Donovan believes that they will be able to get between $35-$40 billion in principal reduction in real dollars out of the settlement. Donovan became the point person on the federal level, along with DoJ, as the Administration pretty much took over the investigation and settlement process from the states, who were led by Iowa AG Tom Miller.

But even this $35-$40 billion number, which is at best a guess since the direction of the principal reduction is mostly at the discretion of the banks, pales in comparison to the negative equity in the country, which sits at $700 billion. And the banks have three years to implement the principal reductions, drawing out the loss on their books. As the New York Times reports, banks have covered reserves for all of this, and should see major boosts to their stock price as a result of the settlement.

The five banks in the settlement — Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial — have largely set aside reserves for the expected cost of the accord and investors are likely to cheer its announcement, analysts said [...]

The deal will not substantially reduce the debt left from the housing bust, nor will it help everyone who may have been hurt by foreclosure abuses. About one in five Americans with mortgages are underwater, which means they owe more than their home is worth. Collectively, their negative equity is almost $700 billion. On average, these homeowners are underwater by $50,000 each.

A recent estimate from the settlement negotiations put the average aid for homeowners at $20,000.

“I just don’t think it’s going to be a life-changing event for borrowers,” said Gus Altuzarra, whose company, the Vertical Capital Markets Group, buys loans from banks at a discount.

I’ve done the math on this before, and you’re talking about $20,000 (when homes are on average underwater $50,000) for 1 million borrowers (when there are 11 million underwater). If Donovan is correct about 2:1 maybe you’re at $30,000-$40,000. And the banks have three years.

There will be plenty more to say about this once we get all of the facts of the claim. In addition, this will have to go before a federal judge to sign off on the settlement. And we won’t know for many years whether this promise on loan modifications, unlike all the others, will take. But it’s going forward. And now the only hope for accountability and justice for the crimes of the financial crisis lie in some scattered lawsuits grandfathered in and Schneiderman’s RMBS working group. One thing is clear – the banks relieved themselves of a significant portion of liability at a price they believe they can easily handle.