Per the AP, the dollar figures in the proposed foreclosure fraud settlement break down like this:
$17 billion would go toward reducing the principal that struggling homeowners owe on their mortgages.
$5 billion would be placed in a reserve account for various state and federal programs; a portion of that money would cover the $1,800 checks sent to those homeowners affected by the deceptive practices.
About $3 billion would to help homeowners refinance at 5.25 percent.
First of all, these are the maximum numbers if all 50 states agree to the settlement; without California and New York those numbers shrink, perhaps by as much as $10 billion. Second, $1,800 checks for people who had their homes stolen from them is just shameful. Third, the money to foreclosure counseling and legal aid, while needed, is a bribe to get them on board this deal. Fourth, 5.25%? The average mortgage interest rate right now is under 4%. Fifth, that’s $17 billion (and less without CA and NY) in a country with $700 billion in underwater mortgages. Sixth… actually this is too painful. It’s beyond a weak deal.
For a look at what would actually help the housing market, Nick Timiaros has some ideas. You can reduce principal across the board, you can empower investors to buy up housing and rent it back to the owners, or work out terms on new mortgages (a modern-day HOLC), and very simply, you could forgive the debt. That line of thinking picked up a champion today in none other than the struggling Presidential candidate, Mitt Romney. Read this carefully.
Richard Wood of Bradenton, Fla., told Romney he’d folded his title insurance company in October 2010. “I invested in some real estate, some rental properties, made what I considered to be very conservative investments during the boom times and right now I am negotiating with the same bank who has mortgages on each of those and an approximate $200,000 deficiency,” he said. “We have been exploring the possibility of moving to another to another country where we might be able to live on our retirement and our Social Security.”
“Yeah. It’s just tragic, isn’t it? Just tragic, just tragic,” Romney said. “We’re just so overleveraged, so much debt in our society, and some of the institutions that hold it aren’t willing to write it off and say they made a mistake, they loaned too much, we’re overextended, write those down and start over. They keep on trying to harangue and pretend what they have on their books is still what it’s worth.”
“Also, Gov. Romney, we got hit with a double whammy,” Wood continued. “My wife, she’s a Realtor — she is in the process of filing for bankruptcy on some debts that she needed to take out in order to try and stay in business the past five years. I’m probably right behind her.”
“That’s tragic,” Romney said. “In some cases, if the debt is not in something you can service, it’s like you have to move on and start over away from those debts. It’s helpful if you get an institution that’s willing to work with you, but if you don’t you have no other option.”
Here’s a loose translation. Romney is saying that the banks have worthless debt that they need to renegotiate. They don’t want to write down the value on their books but everybody knows the books are fraudulent. If they won’t renegotiate, it’s the duty of the borrower to WALK AWAY. If you can’t pay the debt you restructure it. If the debt holder doesn’t like it they shouldn’t have made the loan in the first place. Bottom line.
These are the words of a rational businessman who has dealt in debt for many years – private equity deals often involve massive amounts of debt. If you can’t service the debts you move on. The implication here is that homeowners getting no help on modifications from their banks should just go and pursue strategic defaults.
Somehow I don’t believe that’s what Romney actually had in mind. He just took a businessman’s look at the problem. This answer assumes that the banks are insolvent, that the debt on their books is worthless. Romney acknowledged this. “The banks are scared to death, of course, because they think they’re going to go out of business,” Romney said. “They’re afraid that if they write all these loans off, they’re going to go broke. And so they’re feeling the same thing you’re feeling. They just want to pretend all of this is going to get paid someday so they don’t have to write it off and potentially go out of business themselves.”
That’s an interesting “the banks feel your pain” spin on this. He added that “government is trying to just hold things in place, hoping things get better,” which is in fact what the Obama Administration has done for three years. Romney’s solution appears to be a global debt forgiveness:
“My own view is you recognize the distress, you take the loss and let people reset. Let people start over again, let the banks start over again. Those that are prudent will be able to restart, those that aren’t will go out of business. This effort to try and exact the burden of their mistakes on homeowners and commercial property owners, I think, is a mistake.”
I don’t really know how you reset debt for both banks AND homeowners, it’s probably Romney wanting to be all things to all people. And later, he said that government should “help” banks take this action, which is in their best interest. There’s no question that principal mods would be in the best interest of homeowners and the banks over the long-term. I don’t understand how you reset bank losses, unless you have your Federal Reserve just hand them over a bushel of money.
So this is muddled. And later on in the meeting, Romney singled out Pam Bondi as a hero of the people:
“Where there has been fraud, where people who entered into a mortgage arrangement were mislead by institutions or by individuals — why, there should be an effort to go after those institutions and prosecute them,” he said. “That’s something that Pam Bondi is doing here — the attorney general of Florida — and is hopefully being done in other states as well. Secondly, the banks ought to show greater flexibility in being able to renegotiate with those people who have circumstances that would justify that renegotiation. The banks seem to be paralyzed — I talk to bankers, community bankers and ask why are you not able to work through some of these problems? They say, in part, they’re frightened about what’s happening with Dodd-Frank, and taking actions that may put them in peril.”
The Dodd-Frank thing is gibberish, but really? Pam Bondi is going after the institutions? She’s the one who fired her foreclosure fraud investigators and then got an inspector general to cover it up. I get the sense that Romney, who said in Nevada that foreclosures had to hit bottom back in October, isn’t too keyed in on the details of the crisis.
What I do know is that Romney is positioning himself to oppose this imminent settlement, on the grounds that it won’t help anyone. The President will tout this settlement in tomorrow’s State of the Union address, according to published reports. And yet this would do next to nothing for homeowners while letting banks off the hook for their crimes. Romney comes at this from a business perspective, tells the homeowners that they have power, that if the bank won’t work out their loan, they should just walk away. It’s a pretty striking contrast.