Nearly a year of negotiations between the states and the largest U.S. lenders appear close to yielding a deal that would settle charges of lender misbehavior in servicing mortgages. And while the dollar value might be criticized as small, the agreement’s could lift a thick cloud of legal uncertainty from the housing sector and thus be a boon for banks, borrowers, and the broader economy.
The multistate deal to resolve problems arising from lenders' robo-signing foreclosure documents and other servicing abuses has been called “imminent” too many times to count. But this week, resolution seemed nearer than ever. States have until the end of Monday to decide whether to sign on, and if all 50 do--which looks increasingly likely--the deal could provide $25 billion for borrowers.
Most of that money will be allocated directly to homeowners in various forms of mortgage compensation, including principal reductions, modifications, short sales, and cash payments. Banks won’t necessarily receive dollar-for-dollar credit on the funds they commit, so the arrangement could ultimately cost the five institutions involved – Bank of America, Wells Fargo, JPMorgan Chase, Citigroup, and Ally Financial – as much as $40 billion.
A big part of the deal is a set of servicing reforms to clean up the foreclosure process; it will require lenders work with borrowers to exhaust all alternatives before moving to foreclosure, and to provide clearer information about options. The guidelines are expected to serve as a model to overhaul the industry and are likely to track closely to the servicing standards that President Obama laid out in his housing plan on Wednesday.
After months of fighting over the details, the biggest goal for all involved is to wrap up negotiations as soon as possible so that lenders can put this ugly chapter behind them and borrowers can get relief before they lose their homes. Whether the settlement amount and terms are fair is clearly open to interpretation, but all parties understand that further delays risk holding up an overdue housing-market recovery.
“More and more, the most important thing is to get something done – to get it settled. There are real costs to waiting,” said Ethan Handelman, a vice president with the National Housing Conference. “It is holding everything else up. It makes it hard for lenders to commit to new lending in areas where people really need to start buying homes so that housing markets can restart, prices can come back up, and people can start building equity.”
The settlement has major limitations, but negotiators don't claim that it's panacea. It would not reach the majority of loans, which are stuck in limbo in a government conservatorship held by Fannie Mae and Freddie Mac. It doesn’t address the full range of abuses that led to the housing bubble, just the servicing and origination of the loans held by the five big lenders that dominate the mortgage-servicing market.
“This case is a big case but targets only a segment of the mortgage market,” said Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller who has been a leader in the negotiations with the Justice and Housing and Urban Development departments. “Several states have signed on.… An attorney general can sign on to this case and still pursue other aspects of the mortgage meltdown.”
Estimates of the potential pool of loans that could qualify for relief vary widely from 13 percent to 20 percent of the current market. HUD Secretary Shaun Donovan has projected that at least 1 million homeowners will notice some relief.
In the scheme of the mortgage mess, where $700 billion in mortgages are underwater, half of which are delinquent, $25 billion is a bit like spitting into an ocean. However, most housing advocates want to see the deal done anyway, and the sooner the better. It would provide $25 billion more in housing relief than Congress is likely to appropriate, the money is less likely to be returned unused as some previous federal funds have, and it is more than homeowners would probably be able to get out of the banks on their own.
“It is really time to close the deal. It is time to call the AG settlement the first installment and move on,” said Janis Bowdler, a housing leader with the National Council of La Raza, a Latino civil-rights group. “I take a very pragmatic view here. It is not going to be enough no matter how you slice it, but we need something to break the logjam and give us some momentum. We really need an infusion of support into the housing market right now.”
Just as it will not resolve all borrowers' financial difficulties, the settlement will not eliminate all of the legal and regulatory uncertainty that has kept lenders from extending credit. Still, it will resolve one of the biggest issues hanging over banks, and that’s something their shareholders will cheer.
Billions of dollars for new loans, capital that has been tied up pending a deal, could be released. Thousands of backlogged bad loans will be settled. And while the foreclosure tally is expected to rise as a result, the deal will help the market bottom out, stabilize, and begin to grow again.
“It has become increasingly difficult for banks to write new loans. In that sense, it will be a huge relief,” said Chris Low, the chief economist with First Horizon National Corp.'s FTN Financial. “Investors hate uncertainty. To some extent, this will help settle what the rules are.”