Robo-Deal Is All About Lowering Mortgage Principal

By Diana Olick, CNBC Real Estate Reporter, CNBC

NEW YORK (CNBC)--It took more than a year to strike a deal, but here it is, the biggest government-industry settlement in history, surpassing even big tobacco.

Five of the nation's largest servicers will cough up more than $25 billion, the bulk of which will go toward lowering mortgage principal for borrowers who are behind on their mortgage payments.

Wait a minute.

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What does that have to do with faulty foreclosure documents? Nothing.

But that's how it started, and now that government got what it wanted, i.e. mortgage principal reduction for about a million borrowers, they are likely, quietly whispering a big thank you to all those so-called "robo-signers."

Let's take a step back for a second to remember the fall of 2010, when "robo-signing" came to light. The idea that one low-paid guy sitting in a room was signing his, or perhaps somebody else's, name to thousands of foreclosure documents was appalling. It is appalling, no question. But let us not forget that the vast, vast majority of those foreclosures being processed were in fact legitimate foreclosures; it was the documentation process that was fraudulent. Banks didn't foreclose on borrowers for no reason, they foreclosed because borrowers weren't paying their mortgages.

So fast-forward to 2011 when the housing market is still in deep despair. Home prices are still falling, eleven million borrowers owe more on their mortgages than their homes are worth, home construction sees its worst year ever, and government relief programs are doing very little to help. Cries arise that the only way to help housing is to reduce the principal on all those underwater mortgages, give borrowers their equity back! But how does government force the banks to do that? Robo.

The last thing the banks need are fifty state lawsuits over bad foreclosure documents, plus they need to be able to get all these legitimate foreclosures through the courts, so they can stem some losses by reselling the homes. The "robo" scandal has ground foreclosure processing to a veritable halt in much of the county and slowed it everywhere else. Borrowers are sitting in their homes paying nothing. So the banks agree to the deal, any deal, because they have no other choice.