Forty-nine states’ attorneys general, the five-largest mortgage servicers, and the federal government have settled a probe into shortcuts that lenders took in processing foreclosures.
- The $25-billion agreement was with the five-largest mortgage servicers: Ally Financial Inc.; Bank of America Corp.; Citigroup Inc., J.P. Morgan Chase & Co.; and Wells Fargo & Co.
- Forty-nine states signed on. Oklahoma held out.
- The 49 states will receive $4.25 billion and the federal government will get $750 million in cash up front. The states will redistribute $1.5 billion of their share to an estimated 750,000 homeowners who have lost their homes.
- At least $10 billion will be in the form of principal reduction of underwater mortgages. At least $3 billion will go toward refinancing underwater loans. Another $7 billion will be in “other” forms of relief (the details are unclear).
- Loans under Fannie Mae’s or Freddie Mac’s jurisdiction were not covered by the agreement.
Like many previous plans to stem foreclosures, this agreement will help at the edges. The problem is too big for it to have a large impact, however. A breakdown of the numbers shows why. About $5 billion of the $25 billion will go to homeowners who have already lost their homes, to the states, and to the federal government. This is mostly a transfer of purchasing power from Peter to Paul, and helps neither the economy nor the housing market.
Another $3 billion will help underwater homeowners refinance. This helps at the edges, as does the $10 billion in principal reduction. But the program will not get underway for another 6–9 months and it is spread over three years, diminishing its effect. “Other” forms of relief, which the Fact Sheet describes as “forbearance of principal for unemployed borrowers, anti-blight programs, short sales and transitional assistance, benefits for service members who are forced to sell their home at a loss as a result of a Permanent Change in Station order, and other programs” adds another $7 billion. The details are too sketchy to assess this portion’s effects.
Underwater homeowners are said to owe over $700 billion more than their homes are worth. The amount of the settlement will do little to reduce this.
After laying on the mat for more than two years, the housing market finally began to show signs of life during the second half of 2011. New home construction, builder sentiment, and existing home sales all improved in the second half of 2011. Crucially, the job market picked up speed, and the unemployment rate edged down. This agreement will help the housing market move ahead in 2012 in a small way. But it is hardly a game changer.
by Patrick Newport