President Barack Obama administration and top US mortgage lenders unveiled a landmark 25 billion dollars deal Thursday to help struggling homeowners get back on their feet and to reignite the moribund housing market.
Five of the country's top banks, the federal government and 49 states -- all except Oklahoma -- agreed to help homeowners cut their mortgage debt, avoid default or get compensation for unfair home repossessions.
President Barack Obama said the pact would turn the page on an era of recklessness that has left so much damage in its wake.
The agreement provides a glimmer of hope for four million families who lost their homes during the financial crisis and the millions more who watched the market value of their homes slump while the cost of their mortgages remained at boom-era prices.
It also offers an estimated 2.000 dollars in compensation for everyone who lost their homes amid questions about banks losing paperwork and signing documents without due process -- so-called robosigning.
The housing bubble was at the centre of the 2008 financial crash, the worst in 80 years. In the boom years, Americans borrowed beyond their means as Wall Street overdosed on exotic mortgage-based derivatives, further inflating the market.
While the three-year deal will not come close to cleaning up all the damage caused by the crisis, there is expectation it will be a boon for the market and the broader economy.
But details -- particularly how much is used to write-off mortgage principal -- will determine how much of a boon, according to Ted Gayer, co-director of economic studies at The Brookings Institution.
A lot of the other stuff has already been done with marginal effects, he said.
Lets say we get 10-20 billion of principal reduction... 10-20 billion dollars doesn't seem huge when you are talking about 700 billion in underwater equity, so I would not expect huge effects.
For Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial, the deal begins to close the curtain on a fraught period marked by multiple law suits and government probes.
Supporters hope the deal will make banks more willing to resume lending and, if successful, will show banks the benefits of future voluntary write-downs.
A final agreement can play an important role stabilizing and providing certainty and confidence to the housing and mortgage markets, said David Stevens, head of the Mortgage Bankers Association.
But US Attorney General Eric Holder was quick to stress the deal does not give criminal immunity to lenders, or to traders who improperly sold mortgage-backed securities.
It does not prevent state and federal authorities from pursuing criminal enforcement actions, he said, adding that a new taskforce was looking into how Wall Street securitized mortgages.
The deal will see at least 17 billion spent on principal reduction for borrowers who are delinquent or at imminent risk of default, 3 billion for borrowers who are underwater, and 1.5 billion for those whose homes were foreclosed from 2008 to 2011. Around 4.3 billion will be distributed to states.