A Good Deal, for Whom?

After months of wrangling, the government last week announced a $26 billion settlement with five of the country’s biggest banks that is designed to offer some relief to homeowners victimized by fraudulent mortgage practices and foreclosure abuses.

The five banks include Bank of America, JPMorgan Chase, Citibank, Wells Fargo and Ally Financial.

The goal of the settlement is to hold the banks accountable for a range of shady dealings — ranging from charging new homeowners excessive fees for insurance policies to evicting current homeowners on the basis of unsubstantiated or false information — and also to jumpstart the moribund housing market.

Observers, however, are skeptical about who this settlement will really help. Some say the banks have gotten off easy even as relatively few homeowners will be helped by the promised aid. A column in Sunday’s New York Times business section, for example, suggests that the payback to people whose properties were wrongly foreclosed on will most likely be less than $2,000 per homeowner. The column also describes the settlement as a “stealth bailout of the major banks” because, as one critic points out, “it will improve the value of the second liens or home equity lines of credit [the banks] own” because these holdings are “worthless if the first mortgages preceding them are underwater.”

Nor is there any expectation that the banks will actually carry through on the promised compensation, the column goes on to say, citing other agreements with the government — such as Countrywide Financial’s predatory lending settlement in 2008 — in which banks failed to live up to the terms of a deal.

Finally, skeptics doubt that the mortgage industry’s reputation will be rebuilt after an agreement that offers too little, too late to help either individual homeowners or the overall housing market.

According to Kent Smetters, Wharton professor of business and public policy, “The agreement ostensibly deals with alleged acts committed by banks during the foreclosure process, including improper papering and fees. However, the remedies in the agreement itself use broad brush strokes that do not sufficiently target the harmed parties, instead benefitting some homeowners who simply borrowed more than they can repay. It is not surprising, therefore, that the help is diluted.”

The real problem, he adds, “is not the total size of payments, but a banking system with insufficient accounting systems and securitization processes that render targeted remedies nearly impossible.”

Wharton real estate professor Susan M. Wachter describes the deal as “a start, a down payment, if you will. It covers only a small share of the market. But for those it helps, it will matter. And it may help put into place a template for solving the far larger part of the problem that is out there.”

Indeed, an article last week in The New York Times notes that the money “will help a relatively small portion of the millions of borrowers who are delinquent and facing foreclosures,” but adds that the agreement remains “the broadest effort yet to help borrowers owing more than their houses are worth.” It predicts that about one million people will be able to get their mortgage debt “reduced by lenders or will be able to refinance their homes at lower rates.”

In addition, the article states, the settlement does not preclude regulators from filing criminal charges against banks or investigating other questionable practices related to the housing market, such as insurance and tax fraud or the bundling of risky mortgages into securities later sold to unsuspecting investors.

 

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