Will the $26B Foreclosure Deal Hurt the Housing Market?

After months of high-stakes negotiations by state attorneys general for a multi-billion dollar settlement with banks over mortgage services abuses, a deal was finally announced Wednesday night.

Author:: Zillow.com
Publish date:: Feb 9, 2012 9:16 AM EST

NEW YORK (Zillow) - After months of high-stakes negotiations by state attorneys general for a multi-billion dollar settlement with banks over mortgage services abuses, a deal was finally announced Wednesday night.

In a country where homeowners face $700 billion in negative equity, the news is an opening salvo for one of the biggest drags on the U.S. economy. Settlement funds will be doled out under a complicated formula, but banks will be incentivized to help homeowners the most underwater.

The deal has the backing of about 40 states, including California and New York, where attorneys general in those large states have been pressing for bigger concessions from the banks and the ability to pursue further lawsuits in cases of abuse. While the settlement figure is $26 billion, the number could grow to about $39 billion in value for crisis-struck homeowners.

California’s inclusion in the deal pushes the settlement total to the anticipated $26 billion in relief. That number is in flux depending on the exact number of states that eventually sign on.

Under the settlement, top U.S. banks — Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial — have agreed to contribute, largely by cutting mortgage debt for homeowners whose properties are worth less than their mortgage amounts. Negotiations had been held up by deep-seated concern that the deal was too lenient toward banks.

“For the past 13 months we have been working for a resolution that brings real relief to the hardest-hit homeowners, is transparent about who benefits and will ensure accountability,” said California attorney general Kamala Harris said.

The deal struggled to the finish line as top watchdogs in some of the biggest and hardest hit states worked to ensure any settlement did not let loan institutions off the hook for further investigation.

On Feb. 3, New York AG Eric Schneiderman abruptly called off a press conference and filed suit against the Mortgage Electronic Registration System, a move that signaled how seriously state attorneys general are taking their role in remediating widespread pain brought to foreclosed homeowners. Robosigning on foreclosures was facilitated by what is widely criticized as a loan documentation system that went lax in order to save banks money in the loan-writing process.

By creating this bizarre and complex end-around of the traditional public recording system, banks achieved their primary goal — over 70 million mortgage loans, including millions of subprime loans, have been registered in the MERS system and the industry has saved more than $2 billion in recording fees,” according to the lawsuit filed by Schneiderman.

The lawsuit also claims that over the several years, “banks rapidly securitized and sold off millions of loans, often misrepresenting the quality and nature of the mortgages being transferred.”

Since taking office in 2011, the New York AG had insisted that any robosigning settlement with banks should not grant a legal release from separate claims over how they bundled and sold mortgages to investors.

In New York, where many of these securitized commodities were traded, the AG has fought to preserve the right for a more comprehensive investigation of mortgage-related abuse in order to extract a larger settlement once more of the facts are determined.

While individual homeowners will benefit from this settlement, it is unclear whether the action will move the national housing market to stabilization. The New York Times examined that question in reports.

Christopher J. Mayer, a housing expert at Columbia Business School, said the accord could give banks more certainty that they can clear their large backloads of seized homes, restoring the flow of those homes into the market. “It may be good for individual homeowners, but if you don’t do something to help the foreclosure process, it’s not going to help the housing market,” he said.
Mark Zandi, the chief economist for Moodys Analytics, said that while the settlement looked small compared with the scope of the problem, it was not necessary to erase all, or even most, of the nation’s negative equity to turn the market around. About a third of houses on the market now are distressed, or have been through foreclosure, he said, and reducing that percentage by just a small amount could be enough to put a floor under housing prices.

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