With much fanfare, 46 state Attorney General’s led by Iowa’s Tom Miller and the Justice Department led by Eric Holder announced a $25 Billion settlement between Bank of America, Citigroup, Wells Fargo and JP Morgan Chase for foreclosure abuses between 2008 and 2011, mostly involving the act of “robo-signing” or bank employees signing off on foreclosure documents without reviewing them. Some consumer agencies have applauded the settlement as a banner day for homeowners that have lost their homes in foreclosure or are about to. However, this settlement will benefit the government and banks much more than it will help consumers.
First, consumers will get a relatively paltry sum. The settlement calls for $1.5 Billion to be spread among the almost 750,000 consumers that were foreclosed between 2008 and 20l1, this comes to about $2,000 per person, hardly a consolation to victims of the verified abuses by the mortgage industry at this time. Alabama’s share of the settlement for consumer that are the victims of mishandled foreclosures is $26 million, meaning that about 13,000 former homeowners will get a check for $2,000. This may seem sound an astounding number until one considers that there were 45,515 foreclosures in Alabama from January 2008 through March 2010 according to the Center for Responsible Lending (http://www.responsiblelending.org/mortgage-lending/tools-resources/factsheets/alabama.html). There are reasons for this and these reason are the primary issues with this settlement as a whole.
First, the real winners in the settlement are the state’s themselves. The state’s that participated will get $2.6 Billion, with a large percentage of this going to California. Alabama will get an estimated $106 million. While I am all for a quick infusion of funds into our beleaguered state budgets, I hardly see how giving the Attorney General’s office over a hundred million dollars to spend as they see fit benefits consumers.
Second, the settlement conveniently leaves out the largest mortgage holders, Fannie Mae and Freddie Mac. Together Fannie and Freddie hold about 82% of all mortgage bonds. The vast majority of foreclosures in the country and in Alabama have been mortgages held by a government entity, Fannie, Freddie, HUD or VA. Not including this in this settlement is a gross miscarriage of justice. Attorney General Holder offered that the entities have made efforts similar to the terms found in the settlement, this is actually limited to a rate reduction program for homeowners that are upside down in their mortgage or are in danger of default, it is estimated that if these entities were required to participate in a principal reduction program it could cost more than $100 million. As always the devil is in the details, Fannie Mae’s interest reduction programs require that consumers have good credit with the exception of their mortgage, a requirement precious few homeowners can meet. The Housing Affordable Relief Program (HARP) has benefitted less than one fifth of the estimated 11 million struggling homeowners, the White House released a revised plan in October (http://www.forbes.com/sites/morganbrennan/2011/10/24/the-white-house-unveils-an-initiative-to-help-underwater-homeowners/ ), but so far the results are lackluster at best.
The settlement also leaves out several other banks, but Forbes reports that as many as nine additional banks may sign on to the agreement, even then fewer than 2 million homeowners will benefit from the settlement.
Third, the banks will benefit as they are now allowed to speed up their foreclosure process. Millions of foreclosures have been put on hold while this case has been litigated. These can now proceed. This will have profound effects on the recovery of the housing market. In the short term, supplies will rise dramatically causing pressure on already deflated values. Most experts agree however, that the effect of this may be to allow housing to finally reach bottom so that a recovery can begin.
Lastly, the settlement does not go far enough to help consumers that are “underwater. The terms of the plan allows for $3 billion to help those that are in danger of default because their home is worth less than they owe on it. The primary use of these funds is to offer these homeowners new mortgages with 5.25% interest rates. This would be terrific, except that the current mortgage interest rate is hovering around 4%. The settlement barely mentions modifications to the short sale process, meaning that banks will continue to make odd and poor decisions for those consumer who want to get out of their homes, but cannot meet the terms of any short sale agreement. In Alabama, the agreement does allow for $29 million for this purpose, but again this is too little too late and we will need to wait and see what sort of arcane rules and procedures will be set forth for obtaining these funds.
As Realtors, we need to prepare ourselves for the next trough in the real estate market. It is coming soon, we need to prepare our seller’s for this. Expect values to drop dramatically over the next three years and supplies to rise., The benefit may well be for our buyers as prices drop, more people will be able to afford a home, however expect lenders to tighten even more on buyer qualification which will ultimately make our jobs more and more difficult.
In short the settlement will certainly benefit banks as they are finally able to move on the logjam of foreclosures coming down the pipe. In addition, they will have the luxury of offering beleaguered homeowners new loans at rates well above the current interest rate. The settlement will also benefit state governments, much in the same way that the tobacco litigation settlements helped them earlier. However, it will do little to help those that have been the victims of predatory lending, foreclosure abuses or people affected by declining property values.
Sources:
The Wall Street Journal
The Montgomery Advertiser http://www.montgomeryadvertiser.com/article/20120210/OPINION01/202100301/Advertiser-Editorial-Housing-deal-flawed-OK
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