The ink has barely dried on the landmark $25 billion foreclosure settlement agreement between the nation's five leading banks and a coalition of federal and state government agencies, but there is already a growing murmur of discontent from the financial services industry, consumer advocates and influential media editorial boards that the agreement may actually create more problems than solutions.
David H. Stevens, president and CEO of the Mortgage Bankers Association, commended the agreement as being a key for playing ‘an important role stabilizing and providing certainty and confidence to the housing and mortgage markets.’ However, Stevens warned that the agreement should not be mistaken as the end of the conversation on how to jumpstart the housing market.
‘I would caution, though, that, while a positive step, this will not be a panacea for all that ails housing,’ Stevens said. ‘There are a number of other issues that we need to resolve.Â This includes striking the appropriate balance between consumer protection and access to affordable credit for qualified borrowers in the qualified mortgage and qualified residential mortgage rulemakings, and facilitating the return of private capital to the mortgage market by comprehensively addressing the future of the government-sponsored enterprises (GSEs) and the government's role in the secondary market.’Â Â Â
Also raising concerns was Scott Simon, managing director and head of Pacific Investment Management Co.'s mortgage- and asset-backed securities teams. In an interview with Bloomberg News, Simon stated that the banks got off relatively lightly.
‘This was a relatively cheap resolution for the banks,’ he said. ‘A lot of the principal reductions would have happened on their loans anyway, and they're using other people's money to pay for a ton of this. Pension funds, 401(k)s and mutual funds are going to pick up a lot of the load.’
Dick Bove, vice president of equity research at Rochdale Securities, was equally unimpressed with the settlement. Dubbing the agreement ‘the mortgage deal from hell,’ he used a CNBC interview to identify the settlement agreement as a slap in the face to homeowners who paid their mortgages on time, despite the tumult in the housing markets.
‘Those people lucky or smart enough to stop making payments on their homes may get their loan balances reduced,’ he said. ‘Other beneficiaries of the agreement may be homeowners who have seen the value of their houses drop below the size of their mortgages. They get a freebie that other homeowners who have paid their mortgages down will not get.’
On the consumer advocacy side, the agreement is also failing to get unanimous praise. Michael Calhoun, president of the Center for Responsible Lending, praised the pact as a tool to ‘help build a stronger housing market while keeping more people in their homes.’ But he added that this will not make a positive impact on the continuing foreclosure crisis.
‘This action is crucial to contain the damage foreclosures have heaped on our economy, but it is only one response – and one that is necessarily limited by legal and practical restraints,’ he said. ‘Addressing the massive foreclosure crisis requires additional policy actions on multiple fronts.’
City Life/Vida Urbana, a Boston-based housing and tenants rights organization, issued a press statement questioning the mathematics behind the agreement.
‘The deal includes an estimated $17 billion for principal reduction, which is nothing compared to the $700 billion in negative equity for homeowners in the country,’ said City Life/Vida Urbana. ‘This means that one out of 40 homeowners with underwater mortgages, would get full principal reduction under the settlement. The number of homeowners likely to get this reduction is 1 million out of the 11 million families in need. Each of the 1 million homeowners will get a reduction for $20,000 each. This is absurd, given that almost all of these loans are underwater by at least $100,000 each.’
Dean Baker, co-director of the Center for Economic and Policy Research, used a CNN editorial to wonder aloud on what exactly the banks will bring forth.
‘There is no easy way to determine how much the banks will pay through this route because we don't know what debt write-offs they would have done in the absence of the settlement,’ he said. ‘If the banks are allowed to count every dollar written off as a dollar against the settlement – as though they would have made no write-offs otherwise – then it is possible that they won't pay a dime for this settlement.’
The agreement was also criticized by major media outlets. The New York Times, which ran two editorials on the issue, called the agreement ‘a wrist slap compared with the economic damage wrought by the banks in the housing bubble and bust, and the hardships faced by the 4 million homeowners who have lost their homes and 3.3 million more who are in or close to foreclosure.’ The Times also questioned the absence of Fannie Mae and Freddie Mac from the agreement and the Obama administration's inability to get the GSEs' regulator, the Federal Housing Finance Agency, to work with the parties in the agreement.
‘The best way to get help to many of them is through Fannie Mae and Freddie Macâ�¦which hold roughly 30 million mortgage loans, none of which are covered in last week's settlement,’ the Times argued. ‘The Obama administration has recently increased the incentives for the companies to write down the troubled loans on their books. But in the past, the agencies' regulator has resisted calls to engage in principal write-downs because he fears they may incur undue losses. That makes no economic sense, because defaults and foreclosures are generally far costlier than timely principal reductions. If the regulator continues to balk, President Obama needs to directly challenge his stubbornness and, if necessary, fight for legislation to compel the agencies' cooperation.’
The Philadelphia Daily News editorial board also expressed disappointment, stating the agreement ‘represents a weak rap on the knuckles for the nation's five largest banks, with woefully inadequate aid for Americans whose homes are underwater, and minimal help for the still-crippled housing market.’
Los Angeles Times columnist Michael Hiltzik concurred that homeowners will not benefit from the pact.
‘The states and the feds were in a position to achieve real homeowner relief and a lasting change in the way Wall Street banks do business,’ he said. ‘But that fading sound you hear? That's the parade passing by, leaving Main Street behind.’
(Photo courtesy National Gallery, Oslo)