The 49-State Settlement

As you probably know, the big news today was the announcement of an agreement between 49 state attorneys general (all but Oklahoma’s, who doesn’t think banks should have any liability for the mortgage crisis) and the nation’s five largest mortgage lenders that will insulate the banks from state prosecution for foreclosure fraud, in exchange for $26 billion in “relief.”

I’ll just quote David Dayen’s description of the payout from FDL:

$3 billion will go toward refinancing for current borrowers who are underwater on their loans, as well as short sales. $5 billion will go as a hard cash penalty to the states, which can use them for legal aid services, foreclosure mitigation programs, and ongoing fraud investigations in other areas (one official close to the talks feared that much of that hard cash payout will go in some Republican states toward filling their budget holes). The federal government will get a cash penalty as well. Out of that $5 billion, up to 750,000 borrowers wrongfully foreclosed upon will get a $1,800-$2,000 check if they sign up for it, the equivalent of saying to them “sorry we stole your home, here’s two months rent.”

The bulk of the money, around $17 billion, will go to principal reduction credits for troubled borrowers. The banks will not get dollar-for-dollar credit for every write-down; reductions on loans bundled in private-label mortgage-backed securities, for example, will be under 50 cents on the dollar, and write-downs for second liens (mostly home equity lines of credit) will be more like 10 cents. Housing and Urban Development Secretary Shaun Donovan believes that they will be able to get between $35-$40 billion in principal reduction in real dollars out of the settlement.

The settlement is being generally evaluated as “a lot better than nothing,” but hardly a triumph of justice, since it will address a small percentage of the $750 billion of “negative equity” in the housing market, while getting the banks off the hook for potential criminal liability (though investigations and potential prosecutions can proceed on misdeeds not covered in the settlement).

Given the enormity of the problem–both for individuals and for the country–Mark Gongloff’s conclusion about the settlement seems apt:

If you were explaining this to fifth graders, you’d say that you were turning a hole that was ‘two infinities’ deep into a hole that was ‘one infinity’ deep. It’s still an infinity for most homeowners and gives them little reason not to just walk away from the hole.

Ugh.

Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.