February 9, 2012

$26 Billion Attorney General Foreclosure Settlement

Summary

Anthony Sanders comments on $26 Billion Attorney General Settlement for former homeowners who had their houses foreclosed upon.

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This blog post by Mercatus scholar Anthony Sanders originally appeared at his blog, Confounded Interest on February 9, 2012:

In a nutshell, up to 2 million homeowners could receive mortgage aid through the proposed deal. Under the plan, federal officials said Thursday, about $5 billion will go in cash payments to states and federal authorities, $17 billion will be earmarked for homeowner relief, roughly $3 billion will go for refinancing and a final $1 billion will go to the Federal Housing Administration. If nine other major servicers join the pact, a possibility that is now under discussion with the government, the total package could rise to $30 billion.

So, $26 billion settlement spread over 2 million borrowers averages $13,000 per borrower. [The original number was 1 million borrowers, but today's announcement raised it to 2 million].To be sure, default and foreclosure is a traumatic and horrible event for most borrowers and I have great sympathy for them. And there is frustration by borrowers at not receiving a loan modification (or the frustration of the process). However, the Attorney General settlement is aimed heavily at the process, the “robosigning” issue, rather than the root cause of the problem (decline in home prices and the increase in unemployment during a severe recession).

The robosigning issue, where loan servicers allegedly processed foreclosures without proper review (and sometimes without proper title) confuses two issues: default versus the foreclosure process. The first issue is that the borrower actually defaulted on their promissory note to the lender. Thus, the lender was harmed. The second issue is foreclosure, the process where the servicer attempts to reclaim the dwelling that serves as collateral for the loan. Given the unprecedented volume of defaults, some servicers attempted to speed the process through “robosigning.” Of course, robosigning is not a good way to proceed with foreclosures (particularly without clear and proper title to the collateral). So, the borrower had defaulted on their promissory note. All robosigning did was speed up the already painfully slow foreclosure process – it did not damage or harm the vast majority of borrowers. In fact, it was the bank or investor that was harmed by 1) the default on the promissory note and 2) the borrower failing to move out of the dwelling upon default.

The remedy for robosigning is to review the foreclosures and see if any borrowers were wrongfully evicted. To the best of my knowledge, that has already been done. So, why are 750,000 borrowers receiving checks for between $1,500 and $2,000 if they would have been evicted anyway? Stated differently, the borrower suffered no economic harm while the lender suffered economic harm. Hence, I don’t understand the point of the settlement.

The other issue is that the Attorney Generals feel that more borrowers should have received loan payment reductions and/or principal write downs. We already have private loan modification programs at the targeted banks and servicers along with Treasury’s HAMP and HARP programs. How many different government loan modification programs are we going to create (particularly since they don’t work very well). I am disturbed by the continuing intervention into the private market and contracts between the borrower and the lender by not only the Federal government, but by the State Attorney Generals as well. Chronic intervention is damaging for the housing and mortgage markets and slows the healing process.