Announced with much fanfare by the Obama administration, the national foreclosure settlement agreement could wind up being a great deal for the banks involved. They will be liable for only a miniscule percentage of the damage they’ve done and the bankers themselves will escape criminal charges.

 

Under the terms of the settlement, Wells Fargo, Citibank, Ally/GMAC, JPMorgan Chase and Bank of America will pay $26 billion to resolve cases involving foreclosure fraud: robo-signings, forgery, adding illegal fees and other servicing transgressions that adversely impacted homeowners across the country.

 

Critics of the settlement point to where the $26 billion will be going. According to David Dayen at Firedoglake, “$5 billion will go as a hard cash penalty to the states, which can use them for legal aid services, foreclosure mitigation programs, and ongoing fraud investigations in other areas.” Another $3 billion with be used to refinance the mortgages of a minority of the 11 million borrowers who owe more than the value of their home (a.k.a. underwater loans). Some of this money will go to people who were wrongfully foreclosed upon. Up to 750,000 borrowers will be eligible for a check of $1,800-$2,000, which is, in the words of Dayen, “the equivalent of saying to them, ‘sorry we stole your home, here’s two month’s rent.’” Since the average loan is about $180,000, lucky underwater homeowner with get 1% of what they owe.

 

Most of the settlement, $17 billion, will be committed to reducing the principal for borrowers in trouble. Housing and Urban Development Secretary Shaun Donovan claims that mortgage holders will eventually get twice this much in credit. But even this figure seems like peanuts when one considers that Americans with underwater loans have a total negative equity of $700 billion. The 3 million underwater mortgages that are backed by Freddie Mac of Fannie Mae will not be eligible for principal reduction.

 

According to Yves Smith of Naked Capitalism, the banks won’t really be on the hook for most of the settlement. “That $26 billion is actually $5 billion of bank money and the rest is your money. The mortgage principal writedowns are guaranteed to come almost entirely from securitized loans, which means from investors, which in turn means taxpayers via Fannie and Freddie, pension funds, insurers, and 401 (k)s. Refis of performing loans also reduce income to those very same investors.”

 

Non-bank supporters of the settlement point out that state attorneys general, such as Eric Schneiderman of New York, Beau Biden of Delaware and Kamala Harris of California, will still be allowed to pursue their own cases against the banks. However, as Smith warns, the banks will probably try to settle these cases as well without going to trial rather than risk serious penalties or restructuring of the mortgage business.

 

Oklahoma was the only state to opt out of the settlement because its attorney general, Scott Pruitt, opposes the imposition of any penalty on the banks.

-David Wallechinsky

 

49-State Foreclosure Fraud Settlement Will Be Finalized Thursday  (by David Dayen, Firedoglake)

The Top Twelve Reasons Why You Should Hate the Mortgage Settlement (by Yves Smith, Naked Capitalism)

Why Millions Won’t Get Help From Big Mortgage Settlement (by Cora Currier, ProPublica)

New York Sues 3 Major Banks over Mortgage Fraud (by Matt Bewig, AllGov)

Obama Administration Fights to Halt Bank Investigations by States (by Noel Brinkerhoff, AllGov)