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$25 billion Settlement Filed in Federal Court

The government filed the landmark settlement, which had been announced last month, in U.S. District Court for Washington, D.C. It was signed by five major mortgage companies--Ally Financial Inc., Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co .

Of the $25 billion settlement, around $5 billion will be paid as fines, and another $3 billion will be used to help homeowners refinance. Consumers who were foreclosed upon between 2008 and the end of last year will be paid a total of $1.5 billion, or around $1,500 to $2,000 per borrower.

To pay the remaining $17 billion, banks will receive credits for helping troubled borrowers, of which $10 billion goes toward cutting loan balances for borrowers who owe more than their homes are worth.

The government charged the banks with eight counts of violating federal and state foreclosure and lending laws, outlining the most detailed allegations to date that banks failed to follow the law when foreclosing on homeowners.

About 500,000 borrowers out of 11.1 million with an underwater mortgage may be eligible to receive about $20,000 each toward principle balance reduction.

Here's a quick recap on what each servicer agreed to pay out in the mortgage servicing settlement, according to documents filed with the court Monday and previous servicer disclosures.

Bank of America agreed to pay $2.38 billion to resolve litigation with with federal and state authorities. The bank will provide $7.62 billion in the form of credits for relief such as loan modifications and short sales and $948 million for refinancing for consumers who meet eligibility requirements. The total value of its commitment is about $11 billion.

JPMorgan Chase agreed to pay $1.12 billion to settle with federal and state authorities. It will dish out $3.68 billion in the form of consumer relief credits and $538 million in refinancing. The total value of its settlement is about $5.3 billion.

Wells Fargo will pay roughly $1 billion directly to federal and state authorities as part of the settlement. The San Francisco bank will provide $3.43 billion in consumer relief credit and $903 million in refinancing. The total value of its commitment is about $5.3 billion.

Citigroup agreed to pay $413 million to resolve the litigation with federal and state authorities. It will provide $1.4 billion in consumer relief credit and $378 million in refinancing. The total value of the Citigroup settlement is about $2.2 billion.

Ally Financial will pay $109.6 million to resolve the litigation with federal and state authorities. It will provide $185 million in consumer relief and $15 million in refinancing relief. The total value of its commitment is about $310 million.

Servicers will get an incentive to act quickly over the next 12 months.

For every dollar in principal written down in the first year after the servicers sign on, an extra 25 cents will be credited toward the $10 billion commitment — on top of the full dollar amount considered satisfied. The bonus incentive will likely push servicers to write down as much as possible in the first year, in order to ultimately write down less. It applies to second-lien write-downs and refinances as well.

A servicer will get full credit for every dollar written down on loans held in its own portfolio. But for every dollar a servicer writes down on loans held in mortgage-backed securities, only 45 cents will be credited, according to the documents.

This breakdown was meant to incentivize servicers to spare MBS investors from the penalties. Though the servicers have said they would write down principal where pooling and servicing agreements allow it.

Also, servicers will get fewer credits for writing down principal for borrowers with the deepest negative equity.

According to the agreement, a servicer will get full-dollar credit for write-downs completed on mortgages held on its portfolio with loan-to-value ratios below or equal to 175%. But servicers will only get 50 cents on the dollar in credit for reducing principal on loans with LTVs above 175%.

A servicer writing down principal on a mortgage secured in an MBS but holds an LTV above 175% will get only 20 cents of credit for every dollar written down.

Under the agreement, servicers are required to meet 75% of the entire $20 billion in relief within two years. This includes the write downs, modifications, short sales, forbearance and other actions.

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