From the hype surrounding the newly announced $26 billion settlement over abusive foreclosure and mortgage servicing practices, one might think that it would single-handedly solve the housing crisis and end underwater mortgages. This is not the case.
Like the many versions of President Obama’s refinancing plan, this settlement has large numbers in the aggregate but will probably mean only a little relief for a fairly small number of homeowners.
This is not a policy initiative. It is the resolution to court cases against mortgage servicers for some seriously abusive practices. Overall, the total $26 billion package includes $10 billion for loan principal reductions, $3 billion to help underwater borrowers refinance into cheaper loans, $7 billion for payment forbearance for unemployed borrowers and other forms of relief, and a total of $5 billion in cash payments to states and the federal government
The agreement stems from certain practices by mortgage servicers, including filing foreclosures without having genuine paperwork from the loan, falsely attesting that a responsible individual with the lender has reviewed the paperwork when the signature comes from a temp signing hundreds of similar documents a day (known as “robo-signing”), and promising a loan modification and then filing for foreclosure. There were also a few cases where lenders foreclosed on houses where loans were current or where the mortgage had been paid.
In return, the five lenders who have signed on to the agreement so far—Bank of America, JP Morgan Chase, Wells Fargo, Citigroup, and Ally Financial—promise to have proper documentation before filing for foreclosure, provide notices to delinquent homeowners 14 days before filing for foreclosure, and end robo-signing. Another nine mortgage servicers may sign on to the agreement, a move that could increase the total value. The next step is to file the agreement with the federal courts, and it will take effect only after they approve it. Then the actual agreement will be executed over the next three years.
The new agreement does not fix the housing crisis. As the new Web site of the settlement states, “This is a mortgage servicing settlement that addresses only a portion of the mortgage lending system.” The amount of relief each homeowner or former homeowner receives will be fairly small, and it will depend on individual circumstances and the state of residence. Since the agreement will be executed over a three-year period, so “borrowers will not immediately know if they are eligible for relief.”
The newly announced agreement is estimated to help about 1 million homeowners who are underwater either through refinancing or by having their loans partially forgiven. While the overall numbers are big, The Washington Post notes, “The effects of this deal are likely to be rather modest. In terms of direct help for consumers, the aggregate impact will be quite minor.”
Most estimates say that borrowers who see parts of their loans forgiven as a result of the settlement will see the amount of their loans outstanding drop by an average about $20,000, leaving the rest to be repaid. Nationally, about one-fifth of all mortgages are underwater by an average of $50,000 each, so the settlement deals with only a small proportion of the total.
In addition, thanks to the settlement about 750,000 people out of the roughly 4 million who have already had their homes foreclosed upon are expected to receive an average of about $2,000 each. For loan relief of any kind, the participating banks will receive greatest credit toward their goals by helping borrowers whose loans they still own, and only homeowners whose mortgage is serviced one of the five banks that have signed the agreement so far would qualify. Loans owned by Fannie Mae or Freddie Mac will not qualify.
This agreement represents a real settlement for some real abuses. However, it is easy to get blinded by the media frenzy. Only a small number of homeowners and former homeowners will receive any benefit, and they will not know who they are for some time.