The Mortgage Deal with the Devil
The long-awaited mortgage deal between the federal government, 49 state attorneys general, and five big banks that was announced last month is pretty thin gruel, but it could have been a lot worse.
Under the deal, the banks will provide relief to homeowners in a deal variously described as ranging from $25 billion to more than $40 billion. But a look at the fine print suggests that only about $5 billion in cash will actually change hands. Some $1.5 billion will go directly to homeowners who went through foreclosure, with each receiving about $2,000. Other cash will go to states to help distressed homeowners.
The rest of the money will be granted in the form of ‘credits’ to banks that refinance loans or reduce principal amounts of underwater mortgages. But this is, in fact, funny money. Much of this writedown has already been taken by the banks, which know that an underwater mortgage is worth far less than its nominal value.
In exchange for agreeing to refinance loans, the banks will get protection from penalties narrowly related to the ‘robo-signing’ scandal, in which an assembly line of clerks certified that mortgages had been properly recorded and transferred when, in fact, they were not.
The Obama administration dearly wanted this deal so that it could demonstrate greater help for homeowners and, in turn, relieve the damaging impact of the housing collapse on the economic recovery. The administration’s main programs to date, the Home Affordable Mortgage Program and later the Home Affordable Refinance Program, have been notable failures because they were voluntary for the banks. Bankers got to decide who qualified, and the most seriously underwater homeowners were not eligible. Housing prices have continued to decline.
The actual relief under this latest deal is a drop in the bucket measured against the $700 billion by which mortgages are underwater. The best thing that can be said for the deal is that it could be a down payment for much deeper homeowner relief, if state attorneys general and the newly activated federal prosecutorial task force get serious about bigger criminal and civil suits against banks.
That hope was almost precluded by the agreement. The banks bargained hard for broader protection against future liability. They didn’t get it mainly because progressive state attorneys general held out for the right to continue investigating, filing civil suits, and criminal prosecutions. Recently, as if to demonstrate his seriousness, New York’s Eric Schneiderman filed a suit against Mortgage Electronic Registration System (MERS), the largely illegal electronic mortgage transfer and recording system set up by the big banks to expedite mortgage securitization.
Thanks to pressure from Schneiderman and four other progressive attorneys general, it’s still open season for all other civil and criminal liability related to fraudulent activities by banks and their confederates in the creation, packaging, and marketing of mortgage-backed securities whose abuse was at the heart of the financial collapse.
The question now is whether federal and state law-enforcement agencies will use the authority they have. For the first three years of the Obama administration, the feds have gone far too easy on the banks. Though Schneiderman has been added to a newly activated federal task force, it remains to be seen whether the same Justice Department and Securities and Exchange Commission (SEC) that declined to take vigorous action have truly reversed course.
Ideally, we didn’t need this settlement now. It would have been better for prosecutors to mount more cases, not just related to robo-signing and MERS but aimed at the fraud at the heart of mortgage securitization. Then, prosecutors could extract penalties that more accurately fit the crime—specifically fines and mortgage relief as restitution, well into the hundreds of billions of dollars.
This is said to be Schneiderman’s goal, both in agreeing to join the settlement once it was revised so as not to tie his hands and taking part in the Justice Department task force.
The settlement is (barely) better than nothing only if pressure is kept on the Obama administration to view it not as an end but as a beginning. The signs are good that Schneiderman and the other progressive attorneys general see it that way. But it will take quite a deathbed conversion for the Justice Department and SEC to reverse their record of the past three years.
Robert Kuttner is co-founder and co-editor of the American Prospect.
