HOME WRECKERS / THE ECONOMIST ( HIGHLY RECOMMENDED READING )

America's mortgage settlement

Home Wreckers

Feb 9th 2012, 23:13


by T.E.
NEW YORK   .

AMERICA'S chaotic response to its housing crisis moved into new territory on February 9th with the announcement of a $25 billion settlement between five large financial institutions and a slew of state and federal entities.

Only Oklahoma stayed out of the settlement, with its attorney general Scott Pruitt releasing a scathing statement saying it rewarded homeowners who stopped paying their mortgages over families who continued to pay, thus encouraging more defaults.

The settlement was trumpeted by President Obama, who, on a stage crowded with government officials, said it was a “landmark settlement” that “will speed relief to the hardest hit homeowners” and “turn the page on an era of recklessness.” There will be, he added, refinancing for borrowers “stuck in high interest loans” and reductions in loans for families that owe more than their homes are worth.

Many of the key issues in the settlement remain unclear. None of the announcements even touched upon the reasoning behind a $25 billion price tag for the settlement. Who will receive the money is perhaps an even more pressing mystery. President Obama blamed the actions of banks and other related institutions for causing 4m Americans to lose their homes to foreclosures, but only a fraction will receive relief.

Federal and state governments will get $5 billion from the settlement, with $3.5 billion going into a nebulous pot “to repay public funds lost as a result of servicer misconduct and to fund housing counsellors, legal aid, and other similar public programs determined by the state attorneys general.” The largest pool, $20 billion, will go to homeowners, but there is, at least as of yet, no public formula.

The impact on the financial institutions themselves is unclear as well. On word of the settlement, the share prices of the publicly traded institutions—Bank of America, JP Morgan, Wells Fargo, and Citigroup—perked up, only to slide a bit after the announcement (the fifth, Ally Financial, formally General Motors Acceptance Corp, remains owned by America’s taxpayers after being bailed out). Huge reserves have already been put aside for legal settlements in general and this one in particular, so no large earnings impact is expected.

The administration and various attorney generals insist that the deal would not pre-empt future suits against the banks. But a release from Wells Fargo notes that as part of the deal it has been released from numerous categories of claims. In sum, it appears the line on litigation has been drawn finely enough for the government to say it has preserved the rights of any aggrieved bank clients and for the banks to say the deal ends a sordid legal chapter.

Among the most debated outcomes is the impact on the overall housing market and—because of the housing market’s importance—the American economy. During the settlement negotiations banks were reluctant to initiate foreclosures. This has buttressed the housing market by restricting supply, but left a huge overhang of properties that can be foreclosed.

The process will accelerate. Some families will presumably be spared losing their homes because of settlement funds, but others will not be so fortunate. The result is that many properties could be dumped on to the market. In the short-term this will cause prices to fall and genuine personal agony, but in the longer-term it will clear away a critical source of uncertainty about housing supply and demand. That certainty, ironically, will come at the price of much legal uncertainty.