For over a year now, state attorneys general have been negotiating some kind of settlement deal with the nations four largest lenders, as well as several smaller ones.
The settlement pertains to faulty foreclosure processing, first uncovered in October of 2010 and now commonly referred to as “Robo-signing.”
Rather than dozens of lawsuits, the states initially were looking to assess one great punishment on the lenders and thereby appease borrowers who felt they were wronged. The banks were looking for wider immunity from securitization issues, and that is largely what has held up the negotiations for so long.
Now, suddenly, after umpteen “we’re close to a deal”s, apparently we’re now really close to a deal, largely because the State of the Union address is next Tuesday, and this is an election year. So at a meeting of Mayors Wednesday, the Secretary of Housing and Urban Development, Shaun Donovan, mentioned that a settlement would include principal reduction for about a million borrowers.
“With few other tools to help housing, the administration sees the deal as a way to take credit for helping underwater borrowers without exposing taxpayers to loss,” says Jaret Seiberg at Guggenheim partners, noting that the deal may not fully be in place by Tuesday, but a “framework” could be announced. “If this deal does score enough political points, then it will dampen calls for the administration to roll out more housing help such as a mass refinancing. As we remain dubious about the real impact of a deal, our view is that the administration will face pressure this spring to do more. That means more refinancings of GSE loans will still be on the table,” he adds.
Of course we already know the basic framework of the deal, which would involve up to $25 billion from the banks, though only a small portion of that would be a cash settlement. The bulk of the money would be used to do principal write downs, short sales, and more aggressive loan modifications. Unfortunately, several key states, including Massachusetts, California, New York, Delaware and Nevada have expressed serious concerns about the deal currently on the table, and some bank sources are telling us that without California and New York, it’s hard to see how there would be a deal.
If there is a deal, beyond the politics, it could have a larger effect on the state of the housing market and its recovery. Remember, this deal is about foreclosure processing, which has been nearly stalled in many states. “To that end, it will give banks some increased certainty about their ability to foreclose in those states that sign on to the agreement. As a result, we may see foreclosures ramp up fairly quickly in those states,” says Josh Rosner of Graham-Fisher.
Rosner calls the deal “somewhat nonsensical,” even without knowing the full details, as he believes it offers no assurances to any state regarding specific amounts of relief, not to mention leaving questions about the credibility of the monitoring, oversight, compliance and enforcement of the deal terms. “The expected political calculus is that the public will see the headline and will not bother to watch the operationalization or follow-through,” says Rosner.
My concern is about this principal reduction headline. Yes, the banks processed foreclosures using improper methods, having one person sign off on thousands of documents that were never read. Yes, there was a huge breakdown in accountability and a huge lack of attention paid to struggling borrowers. The trouble is, after going over these cases, the bottom line is that the vast majority of the foreclosures were and are valid. People didn’t pay their mortgages. So now you’re offering cash back to these borrowers, perhaps even their homes back, while others in the very same position, who may have had their foreclosures processed correctly, get nothing.