Will the government’s mortgage settlement work?

By Felix Salmon
February 24, 2011
told me that by the end of the first quarter this year, the government should be in serious discussions with banks about how they're going to fix their broken mortgage operations.

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Back in November, Michael Barr told me that by the end of the first quarter this year, the government should be in serious discussions with banks about how they’re going to fix their broken mortgage operations. Those discussions seem to have started up, on an informal basis, as the government has cobbled together a not-quite-ready-for-prime-time settlement proposal which it will at some point formally present to the banks.

The most interesting part of the proposal, as it’s described in the WSJ, is that it looks as though the banks are going to be encouraged to do principal reductions on mortgages in lieu of paying fines:

If a unified settlement can be reached, some state attorneys general and federal agencies are pushing for banks to pay more than $20 billion in civil fines or to fund a comparable amount of loan modifications for distressed borrowers.

I’m cautiously optimistic about this. There are risks of the banks ultimately getting off very lightly: a fine is a punishment for doing something wrong, while principal reduction, by contrast, can actually benefit banks if they do it right. But in this case it seems that most of the benefit might go to homeowners and bondholders rather than banks.

The one thing I’m sure about is that the final settlement, if and when it arrives, is going to be extremely complicated, and will be presented with great fanfare and a huge headline dollar amount. But the settlement will in reality mark the beginning, not the end, of the process, and the proof of the pudding will be in the execution.

“You should hold us to whether things get better or worse,” said Barr in November. “If a year from now nothing has changed, that would be a reasonable criticism.” There’s still a lot of time to go, on that front. But amid all the noise surrounding the settlement, let’s keep our eyes on the ultimate prize, which is meaningful help for homeowners. Both government and the banks have made lots of promises on that front in the past, none of which have turned out to be worth very much. The settlement will constitute yet another high-profile promise. And we won’t know until much later this year whether it’s done any good at all.


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Thought’s on Mish’s analysis?

http://globaleconomicanalysis.blogspot.c om/2011/02/obama-seeks-20-billion-in-civ il-fines.html

Granted, I’m sure those numbers are probably the lowest possible benefit for each sub-section (since second homes, etc are unlike to qualify for a program like this), but I think he’s right that $20 billion spread out doesn’t make much of a difference in the housing market.

Posted by djiddish98 | Report as abusive

A comparable amount of loan modifications or principle reductions would equal what exactly? With trillions of dollars in real estates values lost, 20 billion, or even 100 billion, will not touch what is needed to get people above water again. If a home in Las Vegas lost, say 50% of it’s value (it’s most likely worse than that too btw), and the banks do a loan mod and/or reduce principle by 10%, what good will it do? Not much.

Metaphorically speaking, if you’re 20 feet under water, and this new buoyancy brings you up a foot or two, breathing will not get any easier.

Posted by BlueTail7 | Report as abusive

Exactly, BlueTail7. The Government wants to be seen as doing something… but it is all cart after the horse boondoggling and will probably end up helping very few and the wrong people. (flippers rather then homeowners … who have the money,savvy and greedy guts to get in line first … and wanna bet there will be hidden fees and banks will end up prospering rather then this be a “punishment”)

They continue throw life lines to banks and crumbs to the very people the banks hurt… nice… and saying the ultimate prize is meaningful help for homeowners is nauseating. (pardon my skepticism, but thus far it looks like “Let’s Make a Deal” with a booby prize rather then help)

They want to prove that in a year… I guess they will have a year to make up a bunch of stats to “prove” some good was done. In that time there will still be oodles of foreclosures, housing prises will still be falling and
the financial sector will still be telling everyone that the recession is over and everything is hunky dory. (Those who are unemployed and losing their homes never mattered or this mess would not have happened, would it)

The Bloomberg piece heralding Geithner that I read at the same time as this almost made me throw up in my mouth…

Posted by hsvkitty | Report as abusive

i really dont see why the government is on a witch hunt to punish these banks. Barney Frank was the one 10 years ago saying we ahd to offer more loan products to people with less than perfect credit. Rather than taking the blame the government keeps trying to blmae and punish everyone else. Forums like http://www.mortgages.com discuss this mroe in detail.

Posted by sherman1002 | Report as abusive