$26B Mortgage Settlement: Good for Banks, Not So Good for Homeowners

[kong]

$26B Mortgage Settlement: Good for Banks, Not So Good for Homeowners
After months of wrangling, the long-awaited foreclosure settlement between the government and the banks appears to be at hand. A $26 billion settlement was announced Thursday morning between the federal government, state attorneys general and the five biggest banks in the mortgage market: Ally Financial (the old GMAC), Bank of America, Wells Fargo, JP Morgan and Citigroup. (Editor's note: An earlier version incorrectly identified Ally Financial as being the old GE Capital.) The settlement is being hailed as the biggest multi-state settlement since the 1998 tobacco agreement. But as Henry and I note in the accompanying video, the settlement is too small to really help the housing market, or even do much for individual victims of fraud and abuse. The deal may, in fact, hurt housing by sending a message to people who've stayed current on their mortgages that irresponsible behavior is what gets rewarded in America. That, presumably, is not the intention of policymakers but the "moral hazard" fallout from the settlement. More Americans may "walk away" from uneconomic loans, which will put additional pressure on local housing markets.
Furthermore, several experts note that for all the rhetoric about punishing corporate crimes and helping victims of abuse, the banks have once again gotten away with a slap on the wrist and may end up benefiting most of all from the settlement. According to The Wall Street Journal, the settlement will be broken down as follows: $5 billion in cash payments, including $1.5 billion to borrowers who were wrongly or illegally foreclosed on between September 2008 and December 2011. Borrowers could receive up to $2,000, depending on the number filing claims. $20 billion in "credits" the banks will receive for principal write-downs and other aid to homeowners at risk of default, up to $20,000 per. This tally includes $3 billion for refinancing of mortgages currently under water.
(Yes, I know 20 + 5 = 25, not 26. It's unclear what the "extra" $1 billion will be earmarked for as details are still emerging on the plan.)
A Drop in the Bucket
Now, $26 billion is a lot of money but it's a drop in the bucket compared with the trillions of dollars of household wealth that's been lost since the bursting of the credit bubble in 2008. Furthermore, $2,000 is a small price to pay to homeowners who lost their homes in illegal foreclosures. The $20,000 mortgage modification is great, except the average deficit for underwater mortgages in America is $50,000. In addition, the $20 billion isn't coming out of the banks' pockets; it's coming from investors and, ultimately, taxpayers. "The mortgage principal write-downs are guaranteed to come almost entirely from securitized loans, which means from investors, which in turn means taxpayers via Fannie and Freddie, pension funds, insurers, and 401 (k)s," writes Yves Smith at Naked Capitalism. "That $20 billion actually makes bank second liens sounder, so this deal is a stealth bailout that strengthens bank balance sheets at the expense of the broader public." Meanwhile, several Fed watchers believe the central bank is gearing up for another round of quantitative easing that will focus on (wait for it) mortgage-backed securities. If QE3 is focused on MBS, it will further ease pressure on bank balance sheets and make any hit from modifications easier to digest. Every state AG, with the exception of Oklahoma, has reportedly agreed to the settlement. One housing expert speculates key holdouts such as New York Eric Schneiderman and California's Kamala Harris agreed to the settlement in return for promises that the banks aren't being completely left off the hook. During the State of the Union address last month, President Obama called for a new financial crimes unit to pursue mortgage-related fraud. Not coincidentally, the SEC is now reportedly stepping up its investigations of illegal marketing and selling of mortgage-backed securities during the boom. The Journal reports Ally, Bank of America, Citigroup, Goldman Sachs and Deutsche Bank are among the firms being examined in the civil investigation.

[kong]

This is one big joke on the American public, and the banksters are laughing all the way. $2000 , WTF, like that is going to help those who lost their houses.......all because Big Business decied to close up house and manufacture their products in sweatshops some where else [China] and Americans not only lose their jobs, their houses, and now have to pay rent or live in the streets.

[kong]

Obama’s Refi Plan Is Another Bank Bailout, Stockman Says: “The Worst Kind of Crony Socialism”
In his State of the Union address last month, President Obama outlined "a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates." Despite stern opposition from Congressional Republicans, the President is still pushing for the plan, which calls for the Federal Housing Administration to take on the risks of the new mortgages created by the mass refinancing. The President says the plan will be paid for by "a small fee on the largest financial institutions [and] give banks that were rescued by taxpayers a chance to repay a deficit of trust." But former White House budget director David Stockman said that's just a smokescreen for the real agenda. "This is ultimately at the end of the day a bailout for JP Morgan and Wells Fargo," and other big underwriters of second mortgages and home equity lines, Stockman says. "Those [second liens] are in great jeopardy because of homeowners way under water on primary mortgages and are likely to default or throw in the keys at some point down the road." Furthermore, the plan would create "FHA-sponsored subprime slime" that refinances homes at up to 140% loan to value, "something even Angelo Mozilo never attempted," Stockman observes. "The White House proposed financing scheme is a lie because they will drastically underestimate the losses due to the amount of jingle mail the FHA will get from underwater borrowers who will default over the next 30 years." Stockman isn't necessarily opposed to the government imposing fees on big banks but says it should be used for deficit reduction, not another scheme to artificially prop up the housing market. Obama's plan is "the worst kind of crony socialism," according to Stockman, who says it's time to end "government meddling" in the housing market, not to mention taxpayer-funded bailouts of the 'too big to fail' banks.