Realty Check

Refi's in Big Bank Foreclosure Settlement: Not Worth It

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It is now almost exactly a year since news headlines screamed of a scandal at the big banks involving faulty foreclosure paperwork and fraud.

Stories of one lowly bank clerk sitting in a room signing hundreds of foreclosure documents added a new word to our daily financial nomenclature: "Robo-signing."

It managed to eclipse "subprime" as the favorite villain of the housing crisis.

But despite the furor, the threats, and the big bank blame game, there is still no settlement between the "robo-signers" (i.e. the big banks) and the fifty state attorneys general who promised payback for borrowers.

Now, as talks are allegedly in their final phase, according to a source very close to the process, the AG's have thrown in another wrench, or perhaps they're throwing a bone.

As first reported by the Wall Street Journal, the AG's are proposing a refinance plan for underwater borrowers, trying to get banks to bring down interest rates on mortgages for those who owe far more than their homes are presently worth; that's around 10.9 million borrowers, according to CoreLogic, but sources say it wouldn't be all of them. It would, "target a finite number of borrowers who are current on their mortgages," according to my source.

My source then went on to explain that this is a plan previously pushed by the California state attorney general, who has dropped out of the negotiations over issues surrounding banks' release from future liability (the California AG did not comment in the WSJ article but claimed they had not seen said proposal). New York and Massachusetts have done the same. Apparently this could, "bring California back to the table," says my source, because the California AG finds it, "intriguing."

Well I don't find it intriguing at all. It's the same plan the Obama administration is "pursuing" with the regulator of Fannie Mae and Freddie Mac. They also want an underwater refi plan, but so far the idea has been rife with difficult details that threaten to scuttle its ultimate impact. The AG proposal would be just for bank-owned loans not backed by Fannie or Freddie, so it would apply to about 20 percent of the market.

My source says the talks are getting closer to a deal, even without some of the AG's signing on. It will include some principal write down on loans, but the future legal liability language is still in play, release from securitization issues is not clear, and the banks aren't exactly thrilled with any of it. So now, at the last minute, they throw in a refi proposal, which maybe the banks will like, likely they won't.

While it may help some borrowers by putting a little extra cash in their pockets, as I've written on this blog before, it doesn't change the fact that these folks still have no hope of seeing their home equity again any time soon, and it doesn't address the greater ills of today's housing market that are keeping true recovery at bay.

It's not the borrowers who are current on their payments that need help, it's the 4 million or so seriously delinquent loans that are heading toward foreclosure, it's the glut of distressed properties now streaming out onto the housing market at ever greater speed, and it's the complete lack of consumer confidence in housing right now that has turned home prices down yet again and kept home sales at historically and unsustainably low levels for recovery.

What do we do about that?

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