Huzzah, we finally have a massive mortgage-foreclosure settlement. At long last banks will be taken to task for sloppy foreclosure practices that ruined millions of lives. The housing market will get a lift, all will be well with the world.
Except probably not so much. The bank foreclosure settlement will do some useful things -- for example, it will break loose a prolonged logjam in foreclosures, helping get the mortgage market back to normal functioning. It may set enforceable standards for future foreclosures, helping borrowers avoid robo-signing nightmares in the future.
But there are at least three big things the settlement will not do:
1. It will not punish the banks, much. The big banks have likely already set aside enough to cover at least a $25 billion settlement, say Wall Street analysts. A one-time payment of $25 billion is tantamount to an annoying tax bill for a group of banks that together took in revenue of $317 billion last year alone. And the vast majority of that $25 billion is going to be paid by investors, not by the banks themselves, suggests Susan Webber of Aurora Advisors, writing as Yves Smith of the blog Naked Capitalism.
In the meantime, having a settlement in hand means the banks finally get rid of a big Sword of Damocles that's been hanging over their heads for years. Shares of Bank of America -- which will pay the biggest chunk of cash in this settlement, including about $8.6 billion to borrowers, according to the AP -- were recently up more than 1% in an otherwise flat stock market, capping a stunning 48% rally so far this year. Investors are plainly not too worried about the future of Bank of America.
Shares of Wells Fargo, the country's biggest mortgage servicer by volume, were flat, while shares of Citigroup and J.P. Morgan Chase were down less than 1% at last check. Wells will pay about $4.3 billion to borrowers, J.P. Morgan Chase will pay about $4.2 billion, Citigroup will pay about $1.8 billion and Ally Financial will pay about $200 million. The five banks together will pay another $5.5 billion to the federal and state governments.
There will be more lawsuits and investigations into other topics, of course. For example, the Securities and Exchange Commission plans to sue some of these same banks, and others, over the stuffing of mortgages into toxic derivatives, the kindling that helped set the global financial system on fire, according to a Wall Street Journal report.
But that suit could eventually lead to yet another one of these wrist-slap universal settlements, which the banks probably greatly favor over a swarm of individual lawsuits -- particularly given the fact that the SEC does not exactly have a reputation as a hanging judge.
2. It will not dramatically affect the housing market. At first glance, the numbers involved in this suit look pretty enormous. Between them, the five mortgage-servicing firms involved in the settlement handle about $5.7 trillion of the $10.3 trillion of US mortgage debt outstanding, according to industry newsletter Inside Mortgage Finance.
But look closer, and the numbers aren't as impressive. While these five banks do the paperwork and debt-collecting and such for more than half of the country's mortgage debt outstanding, they only have about $750 billion, or 8% of the nation's total mortgage debt, actually on their balance sheets, according to Inside Mortgage Finance.
In other words, these banks have direct power to work out only a small chunk of the nation's mortgages.
"It's not like saying these guys do half the mortgages in the country so theoretically half of all mortgage borrowers will get help," said Guy Cecala, publisher of the industry newsletter Inside Mortgage FInance. "It's closer to 1 in 10 -- there's no question it's limited in who it will reach."
The hope is that other big mortgage holders -- particularly Fannie Mae and Freddie Mac -- will follow the example of this settlement and start cutting mortgage principal outstanding, but that's only a hope right now.
3. It will not be much help to underwater homeowners. One great feature of the settlement, maybe the best feature of the settlement, is that it will spend $17 billion to reduce mortgage principal balances. That's probably the best way to give people real debt relief.
The trouble is that this $17 billion will be spread between about a million borrowers, for an average principal reduction of about $17,000. That's nothing to sneeze at, but the average underwater homeowner is underwater by about $50,000, the New York Times notes.
In other words, people are generally going to see a $50,000 hole turn into a $33,000 hole.
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.