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Banks' Foreclosure Pain Persists Even After Settlement

Short sales are considered a better alternative to foreclosures as it minimizes cost to the banks while allowing borrowers time to find alternative accommodation.

Yet it has the same effect as a foreclosure in some ways. The borrower still loses his home and his credit score is damaged.

Critics of the settlement also point out that banks would have pursued short sales anyway and should not be given credit for doing so.

Banks also forgave $19 billion worth of principal. But, here again, most of the relief was on second mortgages, which in the event of foreclosure gets lower priority than the primary mortgage.

Banks forgave only $6.04 billion in primary mortgages. Forgiving the second loan may reduce the total amount of debt owed by the borrower but for those who are deeply underwater and struggling to make monthly payments, this does not help them avoid foreclosure.

Meanwhile, the servicers are racing to fulfill their obligations under the settlement and put it behind them.

Bank of America said Thursday it had completed $30 billion of "real and meaningful relief" and that it is on track to meet its obligations under the settlement by the first quarter of 2013.

But the big banks may find their foreclosure woes are not yet over.

A dozen of the largest mortgage servicers entered into another $9.3 billion settlement with regulators earlier this year over previous foreclosure abuses.

Under that agreement, banks will pay $3.5 billion in direct payments to eligible borrowers and over $5 billion in other assistance, such as loan modifications and forgiveness of deficiency judgments. The agreement covers about 4 million borrowers whose homes were in foreclosure in 2009 and 2010 with the participating servicers.

The settlement would allow lenders to cease the independent foreclosure review process that was mandated under an April 2011 enforcement action.

Regulators had determined that the foreclosure review process, which involved a case-by-case review of millions of loan files, was proving too expensive, time-consuming and ineffective.

But since then, questions have mounted on why regulators terminated the review process so abruptly, amid press reports that the review process was rigged from the beginning.

"The opaque nature of the consent order process and resulting agreement in principle raises many questions about the validity of the IFR and the appropriateness of settlement figures discussed in the news," Rep. Maxine Waters, the lead Democrat on the House Financial Services Committee said in a recent letter to regulators.

Banks may not be able to move on from the foreclosure problems as quickly as they would like to.

-- Written by Shanthi Bharatwaj in New York

>To contact the writer of this article, click here: Shanthi Bharatwaj.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.
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