Editorial | The Foreclosure Settlement

February 11, 2012

Too Many Unanswered Questions, and Too Little Relief


The $26 billion foreclosure settlement between the big banks and federal and state officials is a wrist slap compared with the economic damage wrought by the banks in the housing bubble and bust, and the hardships faced by the 4 million homeowners who have lost their homes and 3.3 million more who are in or close to foreclosure.


The big redeeming feature is that the deal was crafted to allow for further investigation into mortgage abuses that led to the financial meltdown. And President Obama has vowed to follow it up with an expanded inquiry that is supposed to produce broader accountability and a far larger payout. He has to make good on that promise.



At best, this round of relief will reach about two million former and current homeowners. Under the agreement, banks will grant some $10 billion worth of principal reduction, $3 billion in refinancings and $7 billion in other mortgage relief, like forbearance for unemployed borrowers, covering roughly one million borrowers in total. Another $1.5 billion will be cash payments of about $2,000 to some 750,000 borrowers who were treated unfairly in foreclosures from 2008 through 2011.


And $3.5 billion will go to state and federal governments for what has been described as resources for legal aid and other counseling for borrowers facing foreclosure. Such aid is vitally important, but it appears that the earmarked money also could be used to plug state budget holes, rather than empower homeowners in their fights against the banks. That would be a mistake.


What do banks get in exchange for the relief? The answer, in short, is a sweet deal.


The banks did not get the blanket release they originally sought from legal liability for all manner of mortgage misconduct. But the settlement still shields them from state and federal civil lawsuits for most foreclosure abuses, including the wrongful denial of loan modifications, excessive late fees that enriched the banks but could make it impossible for borrowers to catch up on late payments, and conflicts of interest that led banks to favor foreclosures over modifications. Going forward, the banks will have to adhere to tougher standards for servicing loans and executing foreclosures. But past sins in servicing and foreclosure are largely absolved.


The banks are not off the hook for criminal prosecutions related to the mortgage mess or for private lawsuits. They are also not off the hook for wrongdoing in their aggressive pooling of mortgages into securities and other practices that inflated the bubble. Thanks for the settlement’s narrower legal releases goes to New York’s attorney general, Eric Schneiderman, and a handful of other state attorneys general, who refused to accept a deal that would have blocked further legal action.


Which brings us back to the question of whether a new investigation will indeed get off the ground. We are skeptical. The Obama administration squandered several months resisting Mr. Schneiderman’s insistence on a broader investigation, raising questions about its willingness to now get tough with the banks and bankers. As a practical matter, that delay has allowed some potential violations to draw closer to expiration under statutes of limitation.


We applauded President Obama’s decision to appoint Mr. Schneiderman as a co-chairman of the new investigation, along with officials from the Justice Department, the Securities and Exchange Commission and other agencies. But there still needs to be a huge commitment of resources or the effort will never get to the bottom of the wrongdoing.


In an election year, the White House clearly wants credit for doing more to help homeowners. The settlement, properly enforced, could be a step in the right direction. But it is not nearly enough. President Obama will need to press his own administration hard to deliver an unsparing follow-on investigation that results in more clarity, more money and more justice.