Thoughts On The Mortgage Settlement…

Last Thursday, the U.S. Government announced a $25 billion deal with the nations largest banks, over foreclosure abuses related to the housing bubble burst.

Since then, I’ve been promising to deliver my thoughts on the settlement, so here they are: in short, not good.

For starters, the $25 billion is a drop in the bucket - last summer alone these same lenders made $35 billion, so this penalty equates to nothing more than a brief time-out compared to what could have been. It’s been estimated that the fallout from the housing crisis has led to somewhere in the ballpark of $700 billion in negative equity in U.S. households, so any settlement that might be less than say, $175 billion, is a win for the banks.

Further, anyone foreclosed on between September 2008 & December 2010 is set to receive between $1500-$2000 – hardly adequate compensation, considering the fact that so many were either foreclosed on illegally. I think Yves Smith put it best in her blog on The Huffington Post:

“We've now set a price for forgeries and fabricating documents. It's $2000 per loan. This is a rounding error compared to the chain of title problem these systematic practices were designed to circumvent. The cost is also trivial in comparison to the average loan, which is roughly $180k, so the settlement represents about 1% of loan balances. It is less than the price of the title insurance that banks failed to get when they transferred the loans to the trust. It is a fraction of the cost of the legal expenses when foreclosures are challenged. It's a great deal for the banks because no one is at any of the servicers going to jail for forgery and the banks have set the upper bound of the cost of riding roughshod over 300 years of real estate law.”

Also of concern, was any immunity lenders might receive from future prosecution as part of the deal. As the Los Angeles Times reported last Thursday:

“The settlement releases the banks from claims involving foreclosures, mortgage customer servicing and loan originations. However, authorities can still investigate various fraud claims, including those involving the mortgage bonds whose meltdown triggered a global financial crisis.

What's more, there is no criminal immunity or release from private claims by individuals or class-action lawsuits.”

So, it’s a bit gray. Some seem to think that there will be accountability for those responsible – particularly those in the finance industry who had significant involvement in helping to inflate the housing market bubble.

Most – especially those out in the blogesphere – seem to think including Nevada and Arizona’s suits against Countrywide in the settlement, will set a precedence that will make it difficult to go after lenders in some of the ancillary crimes committed in relation to the housing bubble, such as the MERS mess, robo-signing, HAMP/customer fraud violations, etc. Smith profiles “The Top 12 Reasons Why You Should Hate the Mortgage Settlement” in her blog and it’s hard to argue most of her points.

For my money, however, I would say that my views on this lie directly with the views of Brian O’Conner of The Detroit News. Last week, he wrote what I feel is a good an article as any explaining why he doesn’t like the deal. Check it out – it’s worth the read!