By David Urani
Finally, after 16 months of investigations we got the outcome of the nationwide foreclosure lawsuit settlement with the five largest banks, Citigroup (C), Bank of America (BAC), JP Morgan (JPM), Wells Fargo (WFC), and Ally Financial. The final tally is approximately $25 billion of payments of various types, most of which will go to direct mortgage payment relief for borrowers. In the government's view, not only is this a multibillion dollar punishment to those pesky banks, but it also acts as an under-the-table housing bailout. We know that the Obama Administration recently came up with a few ways to overhaul its failing HAMP mortgage modification problem, but interestingly I think this settlement has more firepower than the President's plan. And then there are some retribution payments to states and the feds to top it off.
In all honesty, this is not likely to clean up the massive mess of foreclosures on the market and in the pipeline. As far as changing the dynamics of the housing market, I would not put too much faith behind it. However, millions of homeowners (and former homeowners) could see some extra cash from this. The primary $17 billion chunk of money will go to payment relief for underwater borrowers in various forms. Much of this may be principle reductions and short sales. Perhaps it does give some needed income to some borrowers that are treading water, although a lot of this is likely to end up going to people who are simply underwater but not necessarily in need of a bailout. And of course, big complex efforts like these tend to see their share of fraudsters.
One of the most interesting parts is that roughly 750,000 people who lost their homes in foreclosures could get $2,000 payments. It's got the classic tell-tale signs of an Obama Administration game plan; scorn and take money away from the Wall Street fat cats and spread it around to the needy.
Aside from the direct homeowner relief, $3 billion of the money will go to refinancing efforts to get people into lower interest rates. And then there is about $5 billion set aside for damages and fines that goes into the state and federal coffers.
The idea of giving a pile of money back to the homeowners of course is a good thought in theory. No doubt there were some shady lending practices going on that deserved to be punished, and it may end robo-signing. But as always, you also have to consider the effects of payback like this on a large scale. When you give out penalties to the largest lenders you crimp their ability to lend, so while current homeowners may see a benefit it could be a little more difficult for prospective homeowners to secure a mortgage; it's already tough enough. And this could get bigger, too. The DOJ says that if several of the next biggest lenders jump into the settlement the overall figure could jump to $30 billion or even $40 billion.
Maybe the most poignant part of this whole deal though is that like so many other of the government's policies, it continues to reward those who are irresponsible and gives no reward to those who are savvy and hard working. If you are a responsible homeowner and current on your payments, the joke's on you. You get no bailout if you had the foresight to make a large down payment or have made good progress in paying down your debt; only those who are underwater get the reward. But, congratulations if you stopped making payments and took a free ride from the government while your 2-year or more foreclosure process drags on (many people do this on purpose). To be current on your financial commitments is to miss out on all the free money and rent-free living.
