Will the government’s mortgage settlement work?
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.