The landmark mortgage settlement signed last week is being framed as restitution for homeowners victimized by “robo-signing” bankers who contributed to the 2008 financial crisis. But out of the $26 billion settlement, only $1.5 billion-a mere 6 percent of the agreement-has anything to do with robo-signing.
So what was the point of this settlement?
Nearly two years ago, Ally Financial’s Jeffrey Stephan set off a firestorm by admitting that he had regularly signed off on hundreds of foreclosure notices a day without reviewing the details of the case, a serious violation of state and federal laws since such a practice-known as robo-signing-can lead to households being wrongly foreclosed on.
A few months of robo-signing investigations revealed that nearly every mortgage servicer-those banks that process mortgage payments-was guilty of some kind of processing failure. Then, state attorneys general decided to team up to battle against the banks in a fight for restitution. They ultimately only uncovered a handful of cases where households were improperly given a foreclosure notice. But the letter of the law was broken in hundreds of thousands of cases in which the foreclosure notice was justified (a household was 120 days or more late in making their mortgage payment) but not legally processed.
On Feb. 9, after 16 months of negotiation, the states’ attorneys general finally drew blood on Ally (formerly GMAC), Bank of America, Citigroup, JP Morgan Chase, and Wells Fargo agreeing to a $26 billion settlement (the largest multi-state settlement since 1998’s tobacco lawsuits).
But here is the curious thing:
A $1.5 billion settlement has been set up for anyone foreclosed on by one of the five banks between 2008 and 2011. They can put in a claim and receive a check for roughly $1,500 to $2,000-without even having to prove they were robo-foreclosed.
Beyond that, the rest of the settlement is a grab bag of politically popular goodies. As much as $12 billion has been committed for mortgage modifications, $5.2 billion for short sales, unemployment forbearance, or relocation assistance, $3 billion for mortgage refinancing promises, and $1 billion specifically from Bank of America for cheating the Federal Housing Administration.
And the attorneys general themselves got a $2.5 billion slush fund to spend however they want. You have to love lawyers looking out for themselves. (Don’t be surprised if a few governors also greedily eye the slush fund for replacing stimulus money now plugging their budget holes.)
All of this brings up the obvious question: What was the point of this massive mortgage settlement?
If the point was to provide restitution for those homeowners who were foreclosed on by banks who didn’t own the note on the mortgage or acted before 120 days had passed, that could have been done with a few million dollars.
If the point was to punish the mortgage servicers who violated procedural foreclosure laws, that was achieved with $1.5 billion of this settlement-which will be paid out in checks of up to $2,000 per foreclosed home while the funds last.
If the point was to leverage this investigation into a backdoor means of forcibly reducing mortgage debt, the settlement barely touches the $700 billion the nation is collectively underwater on residential mortgages.
If the point was to extract a pound of flesh from the banks, the settlement’s focus on modifications means that most of this agreement will wind up being paid by mortgage-backed security investors-i.e. pension funds, insurers, and 401(k)s. The principal write-downs and refinanced mortgages represent $20 billion of the $26 billion settlement (77 percent) and they will almost all come from securitized loans -meaning the majority of the costs won’t be borne by the banks themselves (unless they were the investor in the security, which they are likely to avoid modifying).
If the point was to clear up all legal uncertainties surrounding mortgage fraud claims so that banks could feel free to start lending again, the deal also missed that mark by only releasing the servicers from robo-signing related liabilities. That leaves the banks open for other civil and criminal lawsuits from the Feds and attorneys general.
This does not address whether forced principal modifications are a good thing. Or whether the focus of the investigation assumed the very nature of foreclosing was a crime. Or whether the limited liability removal is positive or negative. Rather, it highlights that whatever the point of this deal, it ultimately missed the mark and was unjust.
Unless the point of the agreement was to win political points.
But anyone that actually follows this corner of the mortgage world knows the settlement was well beyond whatever damages could have been caused by robo-signing-which largely just sped up the process of almost all completely justified foreclosures.
The federal government looks like it has finally won a round in the housing market battle after losing time and again with its programs for modifications (HAMP) and refinances (HARP) that have failed. A cursory glance at the story makes it look like justice has been served and relief given to homeowners, victims of the banks lending them more money than they could afford. But the state attorneys general get to walk away with a big headline ($26 billion!) and a perceived victory over the banks. That was the point.
Anthony Randazzo is director of economic research for Reason Foundation