Only 5 percent of underwater homeowners are likely to qualify for mortgage principal reductions under the recent $25 billion foreclosure abuses settlement, an economist with the Brookings Institution has calculated.

Those 500,000 homeowners would see principal reductions averaging $20,000 each, based on the $10 billion of the settlement set aside for that purpose, according to recently published estimates by Ted Gayer, co-director of economics studies for the Brookings Institution. Even so, Gayer estimates that would eliminate only 30 percent of the equity deficit of the average underwater homeowner.

There are currently 11.1 million U.S. homeowners who owe more on their mortgages than their homes are worth, according to estimates by the analytics firm CoreData. Starting from that figure, Gayer devised what he calls a “rough estimate” of how many homeowners will qualify for principal reductions under the settlement.

Fannie, Freddie borrowers not included

Gayer looked at a variety of factors that narrow the pool of qualifying homeowners. The settlement is not open to underwater homeowners with mortgages backed by Fannie Mae or Freddie Mac (approximately 3.3 million underwater borrowers), homeowners must be delinquent or facing default (28 percent of all underwater mortgages) and must have a mortgage with one of the five participating banks, along with several other factors.

Other relief still available

Homeowners who do not qualify for a principle reduction may still be able to obtain relief under other parts of the $25 billion settlement, including mortgage loan modifications. However, borrowers with mortgages backed by Fannie Mae or Freddie Mac will still be excluded.

The settlement, announced last month, resolves potential government claims against five major banks for improper foreclosure practices primarily associated with the robosigning scandal. The five lenders participating in the agreement are Bank of America, JP Morgan Chase, Wells Fargo, Citigroup and Ally Financial (formerly GMAC).

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