A key step was taken yesterday in moving the country beyond the housing crisis, a crisis that triggered the worst recession in decades and whose lingering effects continue to hinder the nation’s nascent recovery. The deal, which brought together 49 state attorneys general and the Justice Department, was a large-scale compromise between states, the federal government, two political parties and the nation’s largest financial institutions. Given the number of players at the bargaining table, it’s no surprise that this isn’t a deal made in heaven. There are significant shortcomings, and critics have already offered legitimate reasons why the deal will not turn the housing market around or even serve justice to those parties that committed fraud and broke the law. At the same time, the settlement will offer real relief to homeowners across the country, and it lays the groundwork for sane regulation of servicer conduct.
Reasons to Cheer
1) The settlement gives homeowners a sense that justice is being done. A cursory read of the complaint filed by New York Attorney General Eric Schneiderman last Friday will give one a sense of the scale of the fraud perpetrated by mortgage servicers in their attempts to quickly process foreclosures. Sure, the vast majority of people who were foreclosed upon deserved to be, but that doesn’t mean that servicers don’t have the responsibility to follow the law and be honest with their customers and the government. While the agreement provides a release of loan origination and servicing claims by state attorneys general against banks, it — importantly — preserves the right of individuals to bring suits. In addition, servicers will now be subject to a federally-enforced set of guidelines, which prevent so-called “robosigning” and makes communicating and negotiating with servicers easier for homeowners.
2) $25 billion isn’t anything to sneeze at. And many homeowners will see real relief when this money is used to affect write-downs and refinancings across the country. Iowa Attorney General Tom Miller also predicted at yesterday’s press conference that “this agreement will eventually make widespread principal reduction commonplace,” arguing that once banks see how effective principal reduction is at preventing foreclosure, they will start to do it more voluntarily. Time will tell if Miller’s prediction comes true, but there’s reason to hope.
3) The banks can start to move on. There’s no question that some egregious examples of fraud were committed over the past several years, and that banks should be penalized for what they did wrong. But we also need these same banks to help fuel a recovery. The uncertainty posed by these negotiations hampered banks’ ability to strategically reassess their lending businesses, and move forward with the kind of activity that will help spur a recovery. As Ted Gayer of the Brookings Institution said in an interview, the settlement will “help banks start unlocking the foreclosure process.” He argues the housing market needs to work through the shadow inventory of homes, and that this deal is a necessary first step.
Reasons to Jeer
1) The banks aren’t really getting much of a punishment, if that’s what you were looking for. The cash portion of the deal is only $5 billion dollars, and that’s split between the big banks. As Yves Smith of Naked Capitalism writes, “That $5 billion divided among the big banks wouldn’t even represent a significant quarterly hit,” let alone the kind of severe penalty that would really scare financial institutions away from these sorts of shenanigans.
2) The settlement will not fix the housing market. There is $700 billion of negative equity in the U.S., and the principal reductions in this package are a drop in the bucket. While some homeowners will find relief, it will be many more years until we collectively climb out of the hole dug by the housing bust.
3) The devil is in the details. Government officials talked tough with regards to their ability to enforce new servicing standards, but time will tell. The most galling aspect of the robo-signing controversy was that it appeared impossible for many homeowners to even know whom they owed money to. But will the federal government have the resources to really enforce transparency and basic standards of customer service and fairness? The mortgage market in this country is vast and complicated, and keeping track of it all will take a lot of work and resources.