In reality, though, it’s a case of bait and switch in which the banks get off too easily.
Under the deal, the banks will have to pay about $5 billion in cash, as well as refinance or reduce the principal on more than $20 billion worth of home loans.
Of that amount, $1.5 billion will be distributed in direct relief to people whose homes were foreclosed on between Jan. 1, 2008 and Dec. 31, 2011, and who were subject to fraudulent practices like robo-signing of documents or deceptive loan terms. Eligible people will receive a one-time payment up to $2,000.
Also, $17 billion will go toward reducing the principal on home loans in cases where people owe more on their mortgages than the homes are worth. The average principle reduction for eligible homeowners is estimated to be about $20,000; about 750,000 people should qualify for the aid.
Further, $5 billion will be placed in a reserve account for related state and federal programs, and about $1.5 billion will help homeowners refinance at 5.25 percent.
In all, 49 state attorneys general approved the deal (Oklahoma was the lone hold-out).
The five biggest mortgage servicers in the United States agreed to the pact: Ally Financial, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo. More lenders may join later.
Most of the money will go to California and Florida, which have the highest number of so-called “underwater” mortgages, where once-inflated housing prices mean many people now owe more than their homes are worth.
Actual implementation of the deal will occur during the next three years. People eligible for aid will be identified and contacted within the next six to nine months.
Attorney General Eric Holder announced the deal Feb. 9, ending 16 months of negotiations between the various parties. (And if you suspect the timing is tied to the upcoming presidential election, I might call you cynical but that wouldn’t make you wrong.)
Holder touted the deal as the largest multi-state settlement since the pact reached with the tobacco industry in 1998. “It does not — it does not — prevent state and federal authorities from pursuing criminal or civil action,” Holder reassured reporters at a press conference.
President Obama said the deal would “begin to turn the page on an era of recklessness that has left so much damage in its wake.”
Advocates for homeowners, however, said the deal is a drop in the bucket and much more needs to be done.
The negative equity of U.S. homeowners — that’s those pesky underwater mortgages again — is estimated at $700 billion. That means the recent deal will help solve about 1/28th of the problem.
Scott Hoberg, a local attorney who defends foreclosure actions on behalf of homeowners, said the deal is inadequate in several ways.
“Individuals who have already lost their home due to wrongful foreclosures — where the banks obtained a default judgment without providing sufficient proof of ownership of the mortgage or the promissory note — will only be entitled to a $1,800 payment,” Hoberg said. “This hardly is monetarily equitable when you consider the harm a foreclosure has on one’s credit score for seven years after the fact.”
Moreover, the deal might actually increase the number of foreclosures. Some banks had delayed action on new cases until some resolution with the state attorneys general was achieved. An estimated 1 million foreclosure-related notices for defaults, auctions and home repossessions could occur this year, according to a report by RealtyTrac.
“Supporters of this deal say it ‘closes the book’ on the problem,” Hoberg said. “Unfortunately, this settlement will not stop banks from foreclosing on homeowners that find themselves in risk of defaulting under their mortgage agreement. Homeowners facing this threat still need to assert their rights in court.”
He added, “The settlement neither prevents homeowners from challenging the foreclosures nor precludes them from working with a bank’s loss mitigation department to reach a remedy independent of the judicial process. If homeowners are at risk of foreclosure, they need to be proactive in finding a solution.”
Others believe the aid should’ve been directly targeted to homeowners, rather than lenders.
Richard D. Wolff, an author and University of Massachusetts economics professor, calls the deal “more rhetoric than reality.” Wolff said the deal is a “trickle down” economic policy, which offers aid to corporations at or near collapse. The alternative is “trickle up” policies, aimed at providing financial aid to the mass of workers.
“The historical record is quite clear: Trickle down is no better or more effective a policy to end deep recessions and depressions than trickle up,” Wolff wrote in Tikkun, a progressive Jewish magazine. “In the last great capitalist downturn of the 1930s, the Roosevelt administration first tried trickle down. Its poor results, coupled with profound political pressures from below … forced Roosevelt to add major trickle up policies. They worked better, but not well enough to overcome the Great Depression.”
Wolff added, “While the government’s help to homeowners is far from adequate or just, it represents a partial and late recognition of trickle-down economics’ inadequacy as policy. It further concedes the need for some trickle up. What happens next depends on the evolution of this crisis and of the political forces gathering strength.”
When all is said and done, the mortgage deal likely will be one of the items that help Obama get reelected this fall. If that’s the case, though, he might find himself facing an even larger number of angry homeowners during his second term.