The National Mortgage Settlement was a $25 billion agreement announced in February 2012 between the five largest U.S. mortgage servicers, the federal government, and the attorneys general of 49 states. It resolved claims that the banks had systematically abused the foreclosure process, most infamously through robo-signing, and it remains the largest consumer financial protection settlement in American history.
The deal did three things at once. It sent roughly $20 billion in relief to homeowners, paid $5 billion to federal and state governments, and imposed more than 300 new servicing standards on the banks that signed it.1Source material, National Mortgage Settlement overview
What the Banks Were Accused Of
After the 2008 financial crisis, servicers processed foreclosures at a speed their paperwork could not support. Employees signed affidavits swearing to the accuracy of documents they had never reviewed. Notarization requirements were ignored. Documents were backdated to fabricate evidence of proper ownership transfers.
The problems ran deeper than paperwork. Servicers often began foreclosures without being able to produce the original promissory note or prove a valid chain of title. Homeowners who demanded that proof, in what became known as “show me the paper” challenges, forced banks to admit they could not always identify who actually owned the loan.
Borrowers seeking help were treated no better. Loan modification files went missing. Different employees at the same servicer gave conflicting answers, and no single person was accountable for a borrower’s case. Foreclosures continued while modification applications were still under review, a practice known as dual tracking.
By October 2010, Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and GMAC had all temporarily suspended foreclosures while regulators investigated.
Who Signed the Deal
All 50 state attorneys general and the D.C. attorney general opened a joint investigation with the U.S. Department of Justice, the Department of Housing and Urban Development, and the Department of the Treasury. Iowa Attorney General Tom Miller chaired the executive committee, and negotiations ran for 16 months.
On February 8, 2012, the coalition announced settlements with five servicers: Ally Financial (formerly GMAC), Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Together they controlled about 60 percent of the mortgage servicing market. Oklahoma was the only state that did not participate.
The consent judgments were entered on April 5, 2012, in the U.S. District Court for the District of Columbia before Judge Rosemary M. Collyer, in United States, et al. v. Bank of America, et al., Case No. 1:12-cv-00361.
How the $25 Billion Was Divided
Of the $25 billion headline figure, $20 billion was designated for direct consumer relief and $5 billion went to state and federal governments.
The consumer relief bucket broke down into three parts. About $10 billion was earmarked for principal reductions on first- and second-lien mortgages, aimed at underwater homeowners. Another $3 billion was set aside to help underwater borrowers refinance into lower-rate loans. The remaining $7 billion covered enhanced short-sale payments, extended forbearance for unemployed borrowers, deficiency waivers, and anti-blight work in hard-hit neighborhoods.
On the government side, federal payments went to the FHA’s Capital Reserve Account, the Veterans Affairs housing fund, and the Rural Housing Service. Roughly $2.5 billion flowed directly to states, and at least $1 billion of that ended up being spent on purposes unrelated to housing. Texas moved almost its entire $135 million share into the general fund. Arizona used $50 million of its $98 million to balance the state budget. Georgia routed its full $99 million to economic development. Others stayed closer to the deal’s purpose: Connecticut sent $22 million of its $26 million to emergency mortgage assistance, and Pennsylvania reserved 90 percent of its $67 million for its housing finance agency.
Payments to Homeowners Who Lost Their Homes
About $1.5 billion of the settlement was set aside for cash payments to borrowers who lost homes to foreclosure between January 1, 2008, and December 31, 2011, on loans serviced by the five banks. Eligible borrowers received roughly $1,480 each. Checks went out in June 2013. Regulators excluded compensation for non-financial harm such as stress or depression, limiting payments to measurable financial injury.
How “Credited” Relief Worked
Not every dollar the banks spent counted as a dollar toward their obligations. The settlement used a scoring system that credited different kinds of relief at different rates, and the rates shaped what borrowers actually received.
Refinancing earned close to dollar-for-dollar credit, with a 25 percent bonus for acting quickly. Modifications on a bank’s own first-lien loans earned relatively generous credit. Modifications on loans the bank only serviced for outside investors earned 45 cents on the dollar, because the bank was spending someone else’s money. Short sales on investor-owned loans earned just 20 cents on the dollar.
The most criticized rate applied to deeply delinquent second-lien loans. Writing off a second mortgage more than 180 days past due earned only 10 cents of credit per dollar, but critics argued those loans were essentially worthless and would have been written off regardless. Banks could accumulate large volumes of credit by extinguishing debt they had little realistic chance of collecting.
To keep the mix from tilting entirely toward cheap credit, the settlement required at least 30 percent of each servicer’s credited relief to come from first-lien principal forgiveness and at least 60 percent from combined first- and second-lien modifications, with caps on categories like forbearance forgiveness and deficiency waivers.
In the end, the servicers provided more than $50 billion in gross borrower relief, which translated to about $20.7 billion in credited relief against their $19.1 billion obligation. They satisfied the consumer relief requirements by June 2013, roughly 18 months ahead of the final deadline.
California’s Separate Deal
California’s outcome was different from every other state’s. In September 2011, then-Attorney General Kamala Harris pulled California out of the multistate negotiations, arguing the roughly $4 billion in relief on offer was inadequate for the country’s largest and one of its hardest-hit housing markets.
Harris ultimately secured a separate guarantee of $12 billion in principal reductions and short sales for California homeowners from Bank of America, JPMorgan Chase, and Wells Fargo. The California agreement was enforceable in state court, unlike the national settlement, which could only be enforced in federal court in Washington. If the three banks fell short of their commitments, they would owe hundreds of millions in additional payments to the state.
In March 2012, Harris named University of California, Irvine law professor Katherine Porter as the state’s independent monitor. Porter’s seven-lawyer office conducted loan-level investigations and intervened directly with banks on individual complaints, a more hands-on approach than the national monitor took. By September 2012, California homeowners had received about $8.9 billion in gross relief, roughly 41 percent of the national total. California also received $411 million of the $2.5 billion in direct state payments, the largest share of any state.
The California template spread. Florida Attorney General Pam Bondi negotiated a $4 billion guarantee from the same three banks, and Nevada secured a $750 million commitment from Bank of America.
The 300+ New Servicing Standards
The settlement required the five servicers to adopt more than 300 new servicing standards, with full compliance required by October 2, 2012. The rules targeted the specific failures behind the investigation.
Each delinquent borrower had to be assigned a single point of contact, one person who knew the file and could stop the runaround. Servicers had to keep electronic records of all borrower interactions and hire adequate loss mitigation staff meeting minimum training and experience requirements. In bankruptcy cases, servicers had to file accurate proofs of claim, correct errors in court filings promptly, and disclose post-petition fees on time.
To address dual tracking, servicers had to give borrowers a real chance to pursue a modification before starting foreclosure, and borrowers had to be allowed to review loan documents to confirm any foreclosure was legally proper.
Oversight and Enforcement
Joseph A. Smith Jr., a former North Carolina banking commissioner, was appointed independent monitor in April 2012. His Office of Mortgage Settlement Oversight issued consumer relief reports tracking financial assistance, compliance reports measuring adherence to the servicing standards, and court reports filed with Judge Collyer.
The enforcement mechanism looked strong on paper. If a servicer’s error rate on any monitored metric exceeded a threshold, it was placed in “potential violation” status and had until the next quarterly compliance report to fix the problem. Uncured violations could bring court-ordered civil penalties of up to $1 million for a first offense and $5 million for repeat violations of the same metric. Servicers that missed consumer relief targets faced penalties of 125 to 140 percent of the unmet amount.
In practice, the monitor’s authority proved narrower than the numbers suggested. When the New York Attorney General moved in 2015 to enforce the consent judgment against Wells Fargo, Judge Collyer denied the motion. She found the alleged violations “insubstantial,” representing less than 0.022 percent of Wells Fargo’s New York loans, and held that enforcement of metric-based servicing standards was primarily the monitor’s job, not the court’s, so long as violations had been cured or never cited by the monitor.
By March 2016, the five original servicers had satisfied their obligations under the first five consent judgments, though three later consent judgments with other servicers remained in effect.
What the Settlement Led To
The 2012 deal became a template. In December 2013, the Consumer Financial Protection Bureau and 49 state authorities ordered Ocwen Financial Corporation to provide $2 billion in consumer relief and comply with the settlement’s servicing standards, with additional protections tied to Ocwen’s large-scale acquisition of servicing rights. SunTrust signed a $500 million consent judgment in September 2014, and HSBC agreed to $370 million in consumer relief in February 2016.
The settlement also shaped permanent federal rules. In January 2013, the CFPB issued mortgage servicing rules under Regulation X and Regulation Z, implementing Dodd-Frank provisions that codified many of the settlement’s reforms into binding federal law. Those rules took effect in January 2014 and cover continuity of contact, loss mitigation procedures, error correction, force-placed insurance restrictions, and protections during servicing transfers. They have been amended several times, including emergency provisions during the COVID-19 pandemic, with a further proposed amendment under consideration as of 2024.
Criticisms
The settlement drew criticism from several directions. The roughly $1,480 payment to homeowners who lost their houses struck many as trivial next to the harm suffered, and non-financial injury was excluded entirely.
The crediting system let banks satisfy their obligations without always bearing the full cost. Writing off deeply delinquent second liens that would likely never be collected, or modifying loans owned by outside investors, allowed servicers to pile up credit cheaply. The Urban Institute later observed that the 2012 deal gave “too little credit” for high-impact relief and “too much credit” for actions of questionable value, a lesson that shaped the structure of the $17 billion Bank of America settlement in 2014.
States’ handling of their direct payments drew its own scrutiny. The settlement placed no binding restrictions on how states spent the money, leaving decisions to ordinary political processes. Some states in severe housing distress moved the funds to unrelated budget needs.