Mortgage Settlement Misses All the Points

Last week’s 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. There are a number of critics who say the deal was too small, and that it should have included more mortgage modification money, but as I point out in a new commentary for Reason Foundation, where the deal is small is on the actual money for individuals that were robo-foreclosed: 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 the settlement? From the commentary:

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.

Most of those households that were robo-foreclosed were ultimately justified—the homeowners were 4 months or later on their payments and unlikely to ever get current again. But there is still a letter of the law that needs to be followed. Mortgage servicers that broke the law should pay fines related to the crimes committeed. But the witch hunt stemming from widespread negative opinion towards the banks sent attonerys general and federal regulators after more than justice—they wanted to a burning.

Strange thing is, they didn’t really even get a burning, since most of the money being paid out in this settlement is coming from MBS investors.

Read the whole commentary here.