Robo-Settlement Snags


Word was last week that federal banking regulators, not the state attorneys general, were going to announce some kind of "enforcement action" against 14 big banks/servicers in the so-called "robo-signing" foreclosure paperwork mess today or tomorrow.

Now I'm told that may be a bit delayed, and now I'm reading the state attorneys general's expected punitive monetary "settlement" is also in question.

The regulators are all about fixing and tightening the process of processing foreclosures. The AGs need to appease their constituents a bit more by getting something back from the big banks, which they claim got homeowners into this mess in the first place and then proceeded to mess it up even more when they couldn't handle the outcome of their wrongdoings, i.e. foreclosures.

The controversy among the AGs is largely over principal forgiveness. Some have proposed a $20-25 billion fund that the banks would pay into that would go to lower the balance of troubled borrowers' loans. A report todayfrom three professors and banking experts, Charles Calomiris of Columbia Business School, Eric Higgens of Kansas State U and Joseph Mason, of the Wharton School of Business, argues that a settlement involving principal write down "would generate significant unintended negative consequences for housing and financial markets."

Here's the gist of it:

"The settlement would be counterproductive in its overall effect because it would drive up the number of defaults and servicing costs. We estimate that even a small increase in strategic defaults in response to the settlement could increase the foreclosure inventory by $297 billion; the proposal would slow new home construction and consumer spending, and reduce access to credit; and the increased costs imposed by the settlement could increase mortgage interest rates by 20 to 45 basis points per year. In light of all of these considerations, we conclude that the settlement would serve to extend, rather than end, the foreclosure crisis."

As regulators and law enforcers battle this out, banks are ramping up foreclosures with increasing speed. A new report from ForeclosureRadar, which measures some of the most distressed markets out West, shows a big jump in March foreclosure sales, the final stage of foreclosure. Total foreclosure sales were up 35 percent in California from February. In Arizona, sales back to the bank (REO) were up over 60 percent and in Nevada bank repo's were up 160 percent.

Granted, March has more days than February, and that juiced the numbers a bit, but the daily averages were also way up.

What this tells me is that the banks want to get these properties through the system and fast; they don't want to wait for a settlement that will slow the process or force them to forgive principal on these troubled loans, which even with reduced balances will likely end up back in foreclosure anyway.

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick