Those of you who have read our previous coverage of the back and forth between the state attorneys general and five major mortgage servicers know that the settlement announced on Thursday is a massive, complicated, multi-year deal negotiated by the country’s most ambitious public prosecutors, its most powerful financial institutions and some of the highest-paid lawyers in New York City. There are several levels to judge it on: the help it gives homeowners; its benefit for various political players; and what it may do for the economy. But overall, it’s a clear win for Obama and Democrats, a qualified win for the banks, and a minor, belated victory for homeowners.
On the surface it may seem like a windfall for some homeowners. Banks are going to be sending checks for $1,500 to $2,000 to up to a million people who were kicked out of their houses and have claimed that “servicing abuse” occurred during the process. The payouts will be nearly instantaneous–”we don’t read anything, it’s check the box,” says one state AG negotiator. And while that money isn’t going to make much difference to someone who lost their house years ago, it certainly can’t hurt a struggling family–or, for that matter, Obama and his party in an election year. Furthermore, you’ll hear Obama aides say that the deal represents the biggest principal write down since the housing collapse. That’s a modest statement, since government programs aimed at encouraging principal write downs have fallen way short of their initial targets. But being able to make the claim is convenient for Obama’s re-election effort.
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The $25 billion price tag on the deal is deceptive. Only $3 billion of the total will go to reduce the interest rates paid by homeowners with loans larger than the current value of their house. More important, only those who are current on their loans will qualify for any of that new money: if you’ve missed payments, you don’t qualify. Which means that only those who can still afford to pay the higher rates on their houses will get relief from this part of the fund. Why do the banks get credit for reducing interest rates only for people who are already capable of paying higher ones? Beats me.
At the same time, the deal may provide more money than the $25 billion figure suggests in principal reductions for close to two million current and former homeowners. The banks have to pay out at least $17 billion in principal reduction or they will face stiff financial penalties. Some of that $17 billion may go to delinquent homeowners, but the banks can work it off in other ways, and the majority of the pay downs will not be dollar-for-dollar. Principal reduction for first and second liens and third-party holders of mortgages are all counted against the $17 billion at different levels—some are dollar-for-dollar, others only count 50 cents to the dollar, and so on. Banks can also work off the $17 billion by giving money to anti-blight projects like land banks and other measures aimed at turning local housing markets around. That means the banks could end up writing down or funding as much as $35 billion in housing fixes.
After$17 billion goes to principal reduction and $3 million for interest rate reduction, the remaining $5 billion will go to state governments to fund local programs like mortgage counseling and legal aid to help struggling homeowners.
Will all this help the economy? Maybe. The settlement will affect only a sliver of an estimated 11 million homeowners who are now collectively more than $700 billion underwater, a huge debt burden that hangs like an anchor around the neck of the economy. Banks may feel better after the deal, though. For years they have moaned that they can’t start lending until they know how much liability they face in the wake of the mortgage meltdown. Thursday’s deal will lift the “cloud of uncertainty that’s hanging over our housing market,” says Housing and Urban Development Secretary Shaun Donovan, by implementing “a single strong set of servicing standards.”
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What started as settlement talks for robo-signing became a huge negotiation over how past, present and future mortgages will be serviced by the big five banks, and the settlement gives some assurance to those institutions about what their exposure to prosecution from the government will be. The agreement releases the banks from claims tied to past servicing foreclosure, robo-signing claims and, most significantly, originating claims. The AGs argue that the originating claims—that is, claims against the banks for making massively irresponsible housing loans to begin with—are all out of date anyway. “The bad originators went out of business four years ago,” says one official close to the deal. And the statute of limitations has run out on many of the originations anyway, the AGs say.
So, was the mortgage fraud settlement worth years of negotiation? If you’re Obama or the bankers, probably. If you’re a homeowner, maybe a little. But don’t expect it to accelerate by much the slow recovery in the housing market.