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Mortgage settlement: One step forward, one step back
With great fanfare, the Obama administration and the state attorneys general recently announced the completion of what’s being touted as the largest consumer financial protection settlement in U.S. history. The country’s top mortgage servicers agreed to provide as much as $25 billion to help some past and current homeowners because banks regularly submitted foreclosure documents that were not properly reviewed or notarized (aka robo-signing).
At first blush, the settlement would appear to present an ideal opportunity for the market — paralyzed in part by the uncertainty over potential legal liabilities — to move ahead towards a much-needed housing recovery. In that regard, its completion was way overdue. In fact, by some accounts the statute of limitations on some of the abuses either had already or was about to run out.
While some will surely argue that the banks should be squeezed for more, the deal does provide some meaningful assistance for distressed and underwater homeowners. Mortgage servicers also agreed to a new set of standards to govern how they must work with homeowners moving forward who are at risk of foreclosure. It’s hard to take issue with a well-intentioned, bipartisan agreement between the legal authorities and the banks over admittedly shoddy mortgage paperwork.
The deal, fortunately, held the line against a massive bailout at the expense of either the taxpayers or big mortgage investors like pension funds. Some might be tired of hearing about investors’ rights or pension fund interests, but in order for the housing market to recover, aspiring homeowners need access to credit, which is generally provided by investors. The backlash from a taxpayer-financed bailout would have been substantial. Thankfully that didn’t happen.
An additional outcome of the deal is that lifting the legal cloud will permit unavoidable foreclosures to resume. Remember, even when the housing market was strong, hundreds of thousands of foreclosures occurred. In many states, the foreclosure process takes between two and three years. The key is to have a fair process, but one that also acknowledges that the path to a recovery in housing will be marked with legitimate foreclosures — as unfortunate and tragic as that may be. Contrary to what some have said, the housing market does need to hit bottom before a recovery can take hold. In fact, it’s the definition of a recovery. But, in order to find the bottom, the vast inventory of vacant homes needs to flow back through the market.
Unfortunately, this is not where the legal saga ends. The hoped-for legal certainty was immediately called into question when the settlement was presented by some government prosecutors as only a “down payment” on continued punishment for the mortgage lending industry. This view was quickly reinforced by the simultaneous lawsuit filed by New York’s attorney general regarding certain mortgage bond practices. And, the Department of Justice recently decided to create what amounts to the nation’s third task force focused on mortgage problems since 2008.
It’s been about 5 years since the housing bubble popped. The common cause should be reducing the amount of time the market rests at or near the bottom. An announcement that the bulk of the outstanding legal issues had been resolved would have been a major accomplishment. Yet, for all its positives, the rhetoric around this mortgage settlement sounds more like one step forward, and one step back.
Papagianis served as special assistant for domestic policy to President George W. Bush. He is now the managing director of Economics21, a nonpartisan policy-research institute.
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