The political theatre is almost complete with the “landmark” national mortgage settlement. Reports indicate that the settlement will be filed in court today. Will it have an effect on the real estate market? Not really, it accomplishes little other than trashing the rule of law. Nick Timiraos elaborates on some of the details.
Of the total $25 billion settlement, around $5 billion will be paid as fines. An added $3 billion will be used to help homeowners who owe more than their homes are worth refinance. To pay the remaining $17 billion, banks will receive credits for helping troubled borrowers, of which $10 billion goes toward cutting loan balances for borrowers who are underwater, owing more than their homes are worth.
The actual amount of loan forgiveness isn’t large relative to the problem of underwater debt. The settlement’s complex set of requirements mean that about 500,000 borrowers, or 5% of those who are underwater, may be eligible for help according to estimates from Ted Gayer, co-director of economic studies at the Brookings Institution.
This graphic is rather misleading because it includes $17 billion in “obligations” that would have existed regardless of the settlement. Getting a credit for debt that would never have been paid in the first place is called a gift, not a penalty under a settlement.
Even after the settlement is filed, many of the proposed principal reductions that are being promised, might not see the light of day anyway. A good chunk of those promised write-downs are involved in securitized trusts. Those trusts have some pretty strict rules on modifications and reductions as protections for investors. As Yves carefully points out in this detailed analysis, the lie behind the mortgage settlement is that a lot of what’s being promised may not even be possible without violating legal provisions in those trusts.
This sideshow parading as an investigation and settlement will at least draw more attention once it is filed. Expect contradictions galore as it becomes clear that this one-sided affair designed to bail out banks yet again is a dramatic failure and a travesty of justice.
Randall Wray also has some great posts at Economonitor highlighting the fraud fest that plagued the mortgage industry. Here are some of the recent posts:
- The Financial Crisis And Shrek’s Onion Of Fraud
- When Is Foreclosure Theft? When The Mortgage Is Recorded At MERS
- Will The Central Bank Bail-Outs Ever End?