By David Min, Alon Cohen | February 9, 2012

   American homeowners will no longer stand alone shouldering the burden of the housing downturn. Today’s announcement of a $25 billion settlement between a consortium of state attorneys general and the nation’s largest banks over alleged misconduct in the processing of mortgage foreclosures provides important assistance for the struggling housing markets. The settlement also frees up state and federal prosecutors to focus on investigating the root causes of the housing crisis and holding accountable the financial firms responsible.

   Today’s settlement provides near-term relief to homeowners who either are in danger of foreclosure or were already evicted from their homes. Importantly, the vast majority of this assistance will be directed to decreasing the outstanding loan balances of approximately 1 million homeowners with mortgages that are “underwater,” or more than the value of their homes. Many analysts, including the Center for American Progress, believe that “principal reductions” are the most effective and sustainable form of foreclosure prevention and have the most positive impact on neighborhoods and markets.

The deal also ensures that the banks primarily responsible for the lending abuses and fraud that were core causes of the housing bubble aren’t allowed off the hook. State attorneys general will now be able to focus their attention on investigating and prosecuting violations that helped cause and exacerbate the housing crisis, as the settlement itself is limited to claims revolving around the so-called “robo-signing” abuses that occurred during foreclosure processing.

Moreover, these state AGs will have significantly more resources to go after wrongdoers, thanks to a new federal mortgage fraud investigation unit led by New York Attorney General Eric Schneiderman, created earlier this year by President Barack Obama.

What does the settlement do?

Today’s settlement between 49 of the 50 states (Oklahoma being the lone holdout) and the nation’s largest mortgage servicers is over allegations that they were “robo-signing” foreclosure documents and engaging in other illegal procedures in foreclosing on millions of American households. The total size of the settlement is $25 billion, broken down as follows:

•   $17 billion fund for principal reductions and other forms of relief. This money will be set aside for the purpose of assisting 1 million homeowners to the tune of about $17,000 each.
•   $3 billion to help homeowners refinance loans to today’s lower market rates.
•   $1.5 billion in cash payments to 750,000 borrowers who were directly impacted by these violations of the foreclosure process.
• $3.5 billion to federal and state governments to help fund state actions to mitigate the housing crisis, including programs focused on housing, such as housing counseling and legal aid.