Do you remember the robo-signing scandal of 2010? What started with a single lawyer interviewing a GMAC employee turned into a national outrage that effectively halted foreclosures by the nation's biggest banks. Bank of America, Citi, Ally/GMAC, JPMorgan Chase and Wells Fargo were accused of making big mistakes like rapidly signing documents without real knowledge of what they were signing.

In February 2012, the above named banks agreed to a $25-billion settlement. Seventeen billion dollars was earmarked for direct principal reduction and other forms of modification designed to help homeowners whose homes were worth less than their total mortgage liability. It was more widely known as "being underwater."

Second, $1.5 billion was designated to provide a direct payment to people who lost their homes due to foreclosure between Jan. 1, 2008 and Dec. 31, 2011 and had mortgages serviced by one of the five settling banks. The exact amount would depend on how many people filed for relief. Additional funds were set aside as payments to each of the 49 states that signed the settlement.

The Program Today
In February, consumer advocates hailed the settlement as a victory for homeowners and the mortgage industry. In November, it was announced that the five banks had already provided $20 billion in relief funds since March. Bank of America, JPMorgan Chase, and Wells Fargo announced that they had completed $7.4 billion, $4 billion and $1.2 billion in relief funds, respectively. However, the reality may not be as positive as Bank of America reports.

Joseph A. Smith, monitor of the settlement, stated that 49% of the money reported by the five banks was used to forgive debts in short sales which still resulted in homeowners losing their homes. Banks have waived an average of $115,672 in more than 113,000 short sales nationwide.

Other Problems
Part of the settlement allows for an independent foreclosure review for borrowers who lost their homes through wrongful proceedings. However, a review by ProPublica shows that the settling banks are taking an active role in the review process with some of the banks helping to set how much compensation homeowners would receive.

As part of the settlement, states received $2.5 billion to assist homeowners in ways that would ultimately prevent foreclosures. Unfortunately, only $977 million has been set aside for that purpose. In addition, states allocated $989 million to budget shortfalls not related to housing matters. Missouri, California, South Carolina, Georgia, Alabama and New Jersey are not allocating any of the funds to mortgage relief.

Is There Hope?
Bloomberg reports that banks must use 60% of the funds for principal reductions on first and second mortgages. This is a mandate that banks are far short of to date. Banks will have to step up the amount of funds allocated for direct principal reduction efforts to keep more homeowners in their homes.

Perhaps the best news is that the number of seriously delinquent borrowers has dropped. About 7% of borrowers are behind at least 90 days according to a report by the Mortgage Bankers Association, and that is the lowest level since 2008.

The Bottom Line
The settlement has fallen short of what consumer advocates thought would be a win for homeowners and victims of the robo-signing controversy. Ultimately, an improving housing market where value is returned to homes will do far more good than any settlement.