Questions and Thoughts on the Mortgage Settlement

If you missed the news (Obama actually made a “big” speech about it), the federal government, along with 49 state AGs, reached a settlement with the largest mortgage servicers over servicing violations.  In some ways, what little detail has been offered raises more questions than answers.

Perhaps the biggest question is how much of the actual losses will be borne by the banks and how much will be passed along to investors, who were not even represented at the table.  One hears that both first and second mortgages would be written down “in proportion” so that if the first loan is reduced 10%, then the second is also reduced 10%.  Obviously this flies in the very face of what a first and second loan are.  The first shouldn’t take any loss until the 2nd is completely wiped out.  But since investors often hold the first while banks hold the second, it looks like Obama has blessed the banks sticking a good deal of their losses to the investors, which include pension funds, retirement accounts etc.

And while I was of course moved by the touching picture of a couple and their child featured so predominantly on the settlement’s website, I was also left wondering, what is the process for determining which foreclosed homeowners receive assistance.  The settlement is actual quite clear that  “$1.5 billion will be distributed nationwide to some 750,000 borrowers” but that such borrowers need not have actually been harmed.  This really seems little more than a lottery trying to pass as consumer protection.  But then I suspect your chances for getting a piece are bigger if you happen to live in a swing state (sorry California).

What really worries me is the massive payment to states.  Of course they claim this is going to help “fund consumer protection” but then we also told that the tobacco settlements would help smokers; it instead turned into state government slush funds.  Even more troubling is the high probability that such funds will flow to various non-profits, whatever the current incarnation of ACORN is calling itself.

Fortunately the entire settlement has to be approved by a federal judge.  Given that these issues really should have been decided in the courts in the first place (separation of powers, anyone?), this is the opportunity for the courts to ask for the AGs and Obama to actually produce some evidence of wrong-doing.  And also to ask that parties actually harmed be the ones compensated.  Anything else would be a perversion of justice.