Foreclosure Settlement Q&A – Who Wins, Who Loses – A Victory For The Irresponsible

A $25 billion foreclosure settlement reached between the government and the big banks has many wondering who will win and who will lose among the different parties involved.  Although the settlement is complicated and will take years to work out, the basic framework will please some and annoy others.

Here are some basic questions and answers about the settlement, which according to the Justice Department was “the result of unprecedented coordination among enforcement agencies” and “the result of extensive investigations”.

Questions and Answers

Question 1

The government has proudly publicized the settlement against the big banks as a major victory for consumers and the housing market.  Will this settlement end the housing crisis and result in higher home values?

Answer:  The government has spent trillions of dollars since 2008 trying to stabilize banks, homeowners and property values.  If they could have solved the problem, they would have.  The $25 billion amount of the settlement represents only a tiny fraction of a percent (0.20%) of total mortgage debt of over $9 trillion dollars.  By comparison, the U.S. government is currently running a deficit of almost $100 billion per month.

Question 2

I heard that the settlement will give people who lost their homes up to $2,000 each even though they were able to live for free in the home for 2 to 3 years before losing it while not making mortgage payments.  Will a borrower who sacrificed to make all mortgage payments on time be given anything?

Answer: No, a borrower who made his payments on time is entitled to nothing.

Questions 3

The mortgage settlement will forgive up to $20,000 of a loan balance for a person who owes more on the mortgage than his home is worth.  I bought my house for $300,000, the same price as my next door neighbor and now our houses are worth $200,000.  I made a downpayment of $100,000 and my neighbor did 100% financing.  Will I be able to get $20,000 forgiven on my mortgage balance even though I am not “underwater” since I saved up to make a downpayment?

Answer: No, you will get nothing since you made a downpayment and are not “underwater” on your mortgage.

Question 4

I heard that people who owe more on their mortgage than their house is worth and have stopped paying their mortgage can get up to $35,000 from the bank for”moving costs” if they agree to sell their home instead of forcing the bank do a foreclosure.  I need to move for a new job and my house is paid off with no mortgage.  Will I be eligible for cash assistance to help with my moving expenses?

Answer: No, you are entitled to nothing.  The “cash for keys” program is only for borrowers who owe more than the house is worth and are not making mortgage payments.

Question 5

The mortgage settlement was only with 5 big banks.  I have my mortgage with a small local lender.  Can I still expect to receive cash payments under the settlement agreement?

Answer:  No, you get nothing.  The settlement is only with the five large banks – Bank of America, JP Morgan, Wells Fargo, Citigroup and Ally Financial.

Other voices on the mortgage settlement

Inside Mortgage Finance

What’s really interesting is the early reaction to how the settlement money will be allegedly spent. Some $3 billion reportedly will be used to compensate as many as two million borrowers who lost their home through foreclosure with a cash payment of $1,500 or more. Did all these borrowers actually suffer specific losses due to foreclosure mishandling? If not, why are we looking to make payments to people who defaulted on mortgages? The bulk of the settlement (reportedly $17 billion) will be used to make principal reductions of $20,000 to current borrowers with underwater mortgages. Sounds good, except that the average underwater borrower probably needs $50,000 or more to get their loan anywhere near the current value of their home.

Aaron Task of The Daily Ticker

The settlement is being hailed as the biggest multi-state settlement since the 1998 tobacco agreement. But as Henry and I note in the accompanying video, the settlement is too small to really help the housing market, or even do much for individual victims of fraud and abuse. The deal may, in fact, hurt housing by sending a message to people who’ve stayed current on their mortgages that irresponsible behavior is what gets rewarded in America. That, presumably, is not the intention of policymakers but the “moral hazard” fallout from the settlement. More Americans may “walk away” from uneconomic loans, which will put additional pressure on local housing markets.

Wall Street Journal

Rarely have so many politicians cashed in so blatantly on so little wrong-doing. In 2010, a group of AGs led by Iowa’s Tom Miller spotted political gold in reports that some bank employees had approved legal documents without proper review. They quickly spun this into the fairy tale that evil banks were kicking borrowers out of their homes for no good reason.

To date there’s no evidence that borrowers current on their mortgage payments were improperly ejected from their homes.

At least $10 billion will go toward principal reduction for delinquent borrowers or those on the brink of foreclosure with loans issued by private lenders. In other words, Washington is taking money from bank shareholders and investors in mortgage-backed securities, who will see the value of their holdings fall, and giving it to people who aren’t paying their bills. Welcome to the “fairness” era.

Meanwhile, 42% of all borrowers with loans in foreclosure haven’t made a mortgage payment in two years, according to Lender Processing Services. They are being rewarded for not paying their bills.