US banks to pay $25bn reparations for housing

New York

America's biggest banks will pay $25bn (£16bn) to alleviate the nation's housing crisis in an unprecedented legal settlement which, although formally only a punishment for specific abuses in the foreclosure process, was being hailed last night as reparations for their role in the boom and bust that triggered the financial crisis.

The settlement, a year in themaking, encompassed 49 stateattorneys-general and five banks that together service more than half of all US mortgages. Nine more banks, including HSBC, are expected to sign on in the coming weeks.

If those other banks do sign on, up to $40bn could be put towards easing the problems in the US housing market over the next three years – a major victory for the Obama administration.

President Barack Obama welcomed the deal as a "start" yesterday. He said: "No compensation, no amount of money, no measure of justice is enough to make it right for a family who's had their piece of the American Dream wrongly taken from them. And no action, no matter how meaningful, is going to, by itself, entirely heal the housing market. But this settlement is a start."

State attorneys-general have been investigating foreclosure abuses since 2010, when it was revealed that many mortgage servicers were repossessing homes without proper review, and often without the requisite paperwork.

The issue became conflated with the wider question of who is to blame for the foreclosure crisis, and public fury at the banks over predatory and subprime lending during the housing boom. Consumer groups were among those to attack yesterday's settlement as being too soft on the banks.

Bank of America, JP Morgan Chase, Citigroup, Wells Fargo and Ally Financial are the five initially involved in the deal. BofA will pay the most – $11.8bn.

The $25bn pot will be divided among the states and among a patchwork of schemes designed to alleviate the foreclosure crisis. More than $10bn will go to pay down the mortgages of borrowers who have fallen behind in their payments, with $10bn more for borrowers suffering from negative equity.

More than 11 million US homes are worth less than the outstanding mortgage, and 1.9 million have been foreclosed in the past two years.

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