Mortgage abuse settlement is not a big deal

9 Feb 2012 by Jim Fickett.

Five major lenders, the federal government, and 49 state attorneys general have reached a settlement over mortgage abuses – mainly robosigning (signing affidavits without actually reviewing them). The settlement is actually very limited in scope. On the one hand, the benefits paid to homeowners by lenders are quite small. And, on the other hand, the banks are getting very limited release of liability. Although many people seem to think this settlement will make a major change in the rate at which foreclosures can clear now, I doubt it.

The best overview of the settlement that I've found is from Adam Levitin at Credit Slips:

The settlement apparently (and here the precise language is crucial) excludes securitization-related claims, fair lending claims, false claims acts violations, MERS issues, and criminal claims. It also doesn’t prevent homeowners or investors from bringing their own suits. So it’s really covering robosigning and overbilling in foreclosures.

Given the relatively narrow scope of this settlement, it’s not surprising that the dollars involved are quite small compared to the overall harms created by the housing bubble and aftermath. The formal price tag for the settlement is $25 billion, although it is projected to accomplish up to $40 billion in relief. Only $5 billion of that is hard cash contributed by the banks. Let me repeat that. The five banks involved in the settlement, which have a combined market capitalization of over $500 billion, are putting in only $5 billion. That’s less than 1% of their net worth. And they are admitting no wrongdoing. To call that accountability is laughable.

That $5 billion in hard cash is going to the state and federal government, only some of which will be given to borrowers. What about the other $20 billion? That’s to come in the form of $3 billion in refinancings and $17 billion in principal reductions, deeds in lieu, short sales, anti-blight measures, etc. …

It’s a drop in the bucket relative to the scale of the problem. There is approximately $700 billion in negative equity nationwide weighing down the housing market and the economy. … It’s Pollyannism to think that this settlement will have any impact on the national housing market. At best it makes some incremental improvements and helps a small number of homeowners.

The settlement also makes little impact on the value of bank stocks. The Financial Times reports:

The five biggest lenders will take a $25bn hit on mortgage principal writedowns and interest payments but the majority will come out of existing reserves.

“This is just a shuffling of losses. There will be almost no impact on bank balance sheets this quarter,” said Richard Staite, US bank analyst at Atlantic Equities.

… Tom Burnell at Wells Fargo cautioned that the banks remain open to litigation on mortgage origination and securitisation practices, as well criminal prosecutions by federal and state governments and claims brought by individual homeowners.