Praise, Condemnation for $25 Billion Mortgage Foreclosure Settlement

Praise, Condemnation for $25 Billion Mortgage Foreclosure Settlement
February 9, 2012

Steve Stanek

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

The deal to force the nation’s largest mortgage lenders to write down some home loans and refinance mortgages for “underwater” borrowers is drawing fire from various quarters.

"It is an abuse of the legal system to use it to extract settlements that benefit homeowners who bought houses they couldn't afford,” said Maureen Martin, an attorney and senior fellow for legal affairs at The Heartland Institute. "There may have been wrongful acts like robo-signing, which ought to be punished with criminal charges, not civil cases like this one.”

The $25 billion deal was announced Feb. 9 by U.S. Attorney General Eric Holder. Bank of America agreed to pay borrowers nearly $8.6 billion. Wells Fargo will pay $4.3 billion; JPMorgan Chase, $4.2 billion; Citigroup, $1.8 billion; and Ally Financial, $200 million. This does not include $5.5 billion in federal and state payments.

The deal also ends federal investigations into Bank of America and Countrywide for inflating home appraisals from 2003 through most of 2009. Bank of America acquired Countrywide in 2008.

Approximately 750,000 homeowners who lost houses between 2008 and 2011 could receive $2,000 each. Most of the money will go to homeowners who are “underwater,” who owe more on their mortgage than their house is worth. But more than 90 percent of underwater homeowners would see no help because they have continued paying their mortgages. The help will go to homeowners who are delinquent on their payments.

Oklahoma Holds Out

Forty-nine states agreed to the deal. Oklahoma Attorney General Scott Pruitt rejected it, saying the deal is "an overarching regulatory scheme . . . to fundamentally restructure the mortgage industry."

Pruitt said it's unfair those who are both underwater and have missed mortgage payments may see their mortgage amount reduced, while underwater homeowners who are current in their payments could only refinance at a lower interest rate.

He raised the issue of “moral hazard,” saying the deal could prompt more people to stop paying their mortgage to have their loan amount reduced.

The Heartland Institute’s Martin also raised a moral objection: "What this settlement means is that individuals who have mortgages with the mortgage lenders involved but are current on their payments—and customers of these banks with checking accounts, savings accounts, or investment accounts—will subsidize borrowers who scammed the system. This is a sham,” Martin said.

Union Boss Backs Deal

Labor leader Richard Trumka, president of the AFL-CIO, had a different take: “The attorneys general settlement announced today is a step towards addressing the housing and foreclosure crisis that plagues our country,” he said in a statement. “The banks broke the law by railroading homeowners through the foreclosure process. Today’s settlement provides compensation for foreclosure victims without requiring individuals to waive their legal claims. The settlement also includes needed principal write-downs so homeowners can stay in their homes.”

The settlement is purportedly aimed at addressing allegations of widespread mortgage foreclosure abuses in the wake of the housing collapse that began in 2008.

Those abuse allegations centered on “robo-signing,” in which persons fraudulently signed hundreds or even thousands of foreclosure documents, claiming they had carefully read them when they had not. Other robo-signers allegedly signed someone else’s name to documents.

Robo-signing was done to speed foreclosures as the collapse in housing values and the economic downturn left millions of homeowners owing more on their mortgages than the houses were worth.

Many homeowners stopped paying their underwater mortgages even though they could still make payments. Others stopped paying because they had lost jobs and lacked the necessary income.

The 49 states agreed not to pursue civil complaints against the lenders, but the agreement allows homeowners to sue the lenders, and it allows federal and state authorities to pursue criminal charges against them.

Ignores Government’s Role

Heartland Institute Senior Fellow Wendell Cox said the agreement is ignoring a major cause of the housing market problems: government manipulation not only in lending but also in land use.

“Everyone continues to fail to deal with the big problem, which is the house values that were increased by restrictive land-use policies,” Cox said. “This is a major reason so many of these people are underwater. Government land-use policies have cost homeowners a whole lot more than $25 billion.”

David H. Stevens, president and CEO of the Mortgage Bankers Association, said in a statement the agreement is “a positive step” but would not “be a panacea for all that ails housing. There are a number of other issues that we need to resolve.” He said these include “striking the appropriate balance between consumer protection and access to affordable credit for qualified borrowers,” and “facilitating the return of private capital to the mortgage market by comprehensively addressing the future” of Fannie Mae and Freddie Mac, which have become the largest players in the mortgage market.

Failure Should Have Been an Option

Doug French, president of the Mises Institute and author of Walk Away: The Rise and Fall of the Home-Ownership Myth (2010), said, “Here we are, going on four years since the Wall Street mortgage market meltdown, and the government has finally cobbled together some sort of plan that was complicated to negotiate and will likely be impossible to implement, instead of just allowing Fannie, Freddie, Bank of America and the rest to fail. Between the Fed and the Treasury, trillions were spent to prop these institutions up, and now they pay $25 billion and can move on down the road.

“Allowing these firms to go bankrupt would have put these underwater mortgages into the market for sale at discounted prices,” he said. “Instead, the government is trying to thread the same needle by force, all the while keeping its banker friends in business. This will do little to clear up the housing problem quickly.”

Steve Stanek

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