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Banks get leeway in foreclosure deal

In February, JPMorgan Chase donated a home to an Iraq War veteran in Bucoda, Wash., and Bank of America waived the $140,000 debt that a Florida man still owed after the sale of his foreclosed home. Over the last year, Wells Fargo has demolished about a dozen houses in Cleveland.

Banks do things like this - real estate transactions that do nothing to prevent foreclosure - all the time. But beginning this month, they can count such activities as part of their new commitment to help people stay in their homes.

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That commitment comes under the landmark $25 billion foreclosure abuse settlement between the government and five major banks announced last month. The settlement promises that of the $25 billion, the banks will give $17 billion “in assistance to borrowers who have the intent and ability to stay in their homes.’’ But more than half of that money can be used in ways that will not stop foreclosures, including some activities that are already standard practices.

The architects of the settlement contend that it was meant not just to prevent foreclosure. The provisions allowing demolition and donation of homes are supposed to force banks to reduce a large inventory of empty homes that are in legal limbo, creating hazards and depressing property values, said Patrick Madigan, an assistant attorney general in Iowa who was instrumental in constructing the agreement. Just because the banks are doing some of those things already, he said, does not mean they are doing them enough.

“There are lots of ways to help homeowners and helping a person stay in their home is the primary one, but it’s not the only one,’’ Madigan said.

The settlement was reached after months of negotiations with the five largest mortgage servicers - Ally Financial, Bank of America, Chase, Citibank, and Wells Fargo - after allegations surfaced in 2010 that bank employees were fabricating or failing to review documents used in foreclosure proceedings. Banks initially fought any requirement to reduce borrowers’ loan size, but the state attorneys general insisted that debt reduction be the linchpin of the plan.

The five banks in the settlement declined to comment.

The government officials who brokered the agreement estimated that a million borrowers would receive relief under the $10 billion-plus for debt reduction and another $3 billion to help borrowers who are current on their mortgages refinance at lower interest rates.

Mark Zandi, the chief economist at Moodys.com, estimates that the total will be closer to 700,000 borrowers. That is partly because there are homeowners who owe so much more than their homes are worth that even the deal’s average aid of $30,000 will not make them less likely to default.

“After looking at the data in detail, I’m beginning to wonder if you’re going to find enough homeowners where principal reduction works in a meaningful way,’’ Zandi said.

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