Arizonans to divide $1.6 billion in mortgage relief

PHOENIX — Arizonans will divide up about $1.6 billion from a nationwide settlement announced Thursday with five major mortgage lenders.

The cash is part of a $26 billion pact to settle claims that the lenders acted improperly and illegally in dealing with homeowners who sought mortgage relief. The allegations range from refusing to work in good faith with borrowers to outright fraud in offering up documents to courts to foreclose on homes.

Thursday's settlement came after California and New York finally agreed to become part of the settlement. That left only Oklahoma to deal on its own with the lenders.

But it also was waiting on Arizona Attorney General Tom Horne finally settling a separate lawsuit the state had filed in 2010 against Bank of America alleging various types of fraud.

Horne said Thursday that had to come first, as the national pact absolves the five lenders of any future civil liability. More to the point, if Arizona had signed the national deal first, it would have forfeited any chance of a separate recovery.

As it is, Bank of America has agreed to pay the state another $10 million.

Some of that will go to individuals who were harmed by the bank's foreclosure activities. And some of that will go to efforts by Horne's office to prosecute financial fraud.

The biggest chunk of Arizona's share of the settlement — $1.3 billion — is earmarked to directly help those who are “underwater'' with their mortgages, owing more than the property is worth.

Horne said most of that piece has to be used to reduce the principal owed. But he said that does not mean homeowners will find their mortgages reset to current property values and that, even after the help, the outstanding balance may still be more than the home would bring in a sale.

He also could not spell out exactly how much help any one borrower would get, saying each lenders will have to set its own standards. That means the banks could do a large number of small-amount reductions or a smaller number of bigger write-downs.

To qualify, though, homeowners have to be current on their mortgages. Horne said it would be irresponsible to reward those who have fallen behind.

“The mere fact that you're underwater doesn't mean you shouldn't continue to make your payments.”

And the funds are specifically set aside for those whose “loan-to-value'' ratio is 175 percent, meaning that the amount owed is equal to 1.75 times what the house is worth.

But some of that $1.3 billion also is available for other types of relief.

For example, it could be used to facilitate a “short sale,'' allowing the home to be sold when the mortgage balance exceeds the value of the property without ruining the credit rating of the borrower.