Mortgage Deal Hurts Honest Borrowers

Mortgage Deal Hurts Honest Borrowers
March 2, 2012

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)

If you have a home mortgage and have dutifully paid it each month, as you promised you would do when you signed the loan papers, you’re a chump.

That’s the message the federal government and officials in 49 of 50 states have sent in announcing the $25 billion mortgage foreclosure settlement with Bank of America and the nation’s other largest mortgage lenders.

Borrowers who are “underwater” on their mortgages—meaning they owe more than their house is worth—and who have missed mortgage payments could see $20,000, on average, knocked off their mortgages.

Underwater borrowers who are current on their mortgage payments—who have continued paying their mortgages even though they are underwater—get almost nothing. This is the vast majority of underwater borrowers. They may be able to refinance into a new mortgage with a lower interest rate, but they’ll still owe as much money.

And the rest of us who are neither underwater nor delinquent with our mortgage payments, yet whose housing values have fallen? Suck it up, the government says.

There’s been lots of breath expended and ink spilled talking and writing about the plight of the poor underwater homeowner. Oh, woe are they, stuck with a mortgage balance that totals more than the house is worth.

Do we have such pity for people who borrow money to buy new cars? Shortly after driving the car off the dealer’s lot, many buyers have a loan that totals more than the car is worth. They in fact have a piece of property that is almost guaranteed to fall in value, eventually to virtually nothing, if they hold it long enough. Housing values could start climbing again, and underwater mortgages may be underwater no more.

Should auto loan borrowers be pitied and told they should stop paying their car loans because the automobile they purchased is worth less than the loan balance? Should the federal government and state attorneys general step in to force lenders to write down their auto loans?

When lenders loan money and expect to get it back, with interest, and then don’t get the money back—when they are in fact forced to part with billions of dollars by the government to meet its politically driven ends—someone must pay for it.

The banks won’t pay for it. The beneficiaries of the settlement largesse won’t pay. This settlement will be paid for by individuals who have behaved prudently and morally and stayed current on their mortgages. It will be paid for by the customers of these banks through higher fees, fewer services, and lower returns on their checking, savings, and investment accounts.

One state attorney general sees what is happening and cared enough to reject the settlement: Scott Pruitt of Oklahoma.

“You need to know that of the $25 billion, only $6.7 billion is real money,” Pruitt told the Tulsa World. “Although the banks agreed to a settlement of $25 billion, they are only writing checks for $6.7 billion. The balance of the $25 billion is where the administration used it to engage in principal modification and loan modification.”

“We believe the master settlement in Washington, D.C., is more about fixing the housing market and less about truly trying to address unlawful conduct on a state-by-state basis,” he said.

If there really was “robo-signing” going on—fraudulent signing of thousands of mortgage documents—that is indeed criminal conduct that warrants criminal charges, not civil settlements that effectively penalize borrowers and bank customers who have acted responsibly.

Bank of America and the other behemoth lenders that have been bailed out by taxpayers should have been allowed to fail. So too should the government-sponsored entities Fannie Mae and Freddie Mac, which have played a huge role in the housing bubble and burst yet have gotten off scot-free. The Dodd-Frank financial regulatory bill that became law in the wake of the financial collapse goes on for more than 2,000 pages, yet does not touch Fannie or Freddie.

Executives and directors of these institutions should be up on criminal charges. Their institutions have received trillions of dollars of Treasury Department bailouts and Federal Reserve handouts. A $25 billion settlement is small change compared to that.

And it’s change that ultimately comes out of the pockets of people who have done what’s right, including the millions of people who have continued paying their mortgages even though they are underwater.

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute in Chicago.

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)