Is The Foreclosure Abuse Settlement A Good Thing?

Is The Foreclosure Abuse Settlement A Good Thing?

I've been debating all day about whether or not to write this post about today's announcement about the $25 Billion foreclosure abuse settlement between the US government and 5 major banks. As I understand it the settlement includes several provisions as to where the money from the banks will go:

  • $1.5 Billion goes to borrowers who went through foreclosure between September 2008 and December 2011. These people are expected to receive $1,500 to $2,000 each, depending upon the number of borrowers filing a claim.
  • $3.5 Billion in cash penalties goes to the federal government and the states
  • $17 Billion is targeted for principal reductions for people who are underwater on their mortgages and delinquent in their payments. However, some suggest that the total bill for the principal reductions could be as high as $34 Billion.
  • $3 Billion will go towards refinancing mortgages for people who are underwater on their mortgages but current with their payments.
  • Of the total, $18 B of the mortgage settlement funds are going to end up in the state of California?!?!?!?

OK. I'm really curious as to what people think about this deal. Does anyone else think that something is out of whack here? There is no question that the banks violated the law with their foreclosure shortcuts. However, I have not read much about any real damages suffered by the victims of this whole mess. If we look at the way the settlement ended up we could conclude that the damages totaled no more than $1.5 B because that was what the victims were awarded.

Then, understandably, there are penalties - $3.5 Billion worth - for breaking the law. That makes sense. But what's this other $20 Billion about? 80% of the settlement funds are going to giveaways towards people who are underwater on their mortgages and 85% of those funds are going to people who are delinquent on their mortgages. What does any of this have to do with foreclosure abuses? And when $17+ Billion goes to people that aren't paying their mortgages what does that tell the people who are paying their mortgages?

When you read some of the comments on this deal it becomes clear that what is really driving the government is an intense desire to find someone to blame for what has happened to the housing market and the banks are a very easy and attractive target. Here is what the critics are saying about the foreclosure abuse settlement.

I've heard this settlement referred to as a stimulus program but that is a lie. All this is is another wealth redistribution scheme and when all you do is slice the pie up differently it doesn't make the pie any bigger.

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  • Looks like an undercover bailout for California.

    Of course, you never hear if the "victims" in this mess were paying their mortgages or not. We all know the answer....

    This is basically like having your house burglarized. You shoot the guy in the knee cap with your unregistered firearm. Instead of admitting you didn't register the firearm like you were supposed to, you lie about it (hence the robosignings). The lie you told has nothing to do with the guilt or innocence of the thug burglarizing your home.

    However, some enterprising defense attorney figures out you lied about the unregistered hand gun and uses that as the defense. Not only that; they turn around and sue you for lying. The judge then determines that because you lied about the gun, the burglar is now entitled to compensation/damages for your lie ignoring that the guy just took all your stuff.

    That is essentially what is going on....

    Banks lent money. Didn't get paid back. Want the house. Got sloppy with the securitization and forged documents. Foreclosure defense attorneys figured out paperwork wasn't in order and used that as a way to stall and get their clients out of foreclosure. No one is denying the people weren't paying the mortgages....

    All this does is raise costs and create more paperwork for everyone else. I'm sure there will be at least another 10 pages added to the closing documents as a result...

  • In reply to Russ Martin:

    That's a damn good analogy. Yeah, for sure the victims weren't paying their mortgages because that's why they were being foreclosed upon. No one even denies that.

  • In reply to Russ Martin:

    One flaw is that the bank offers to re-negotiate with you and makes it so complicated that you miss out and lose your house.

  • I feel bad that these people lost their houses, but the whole story is being spun like the banks were basically stealing houses from innocent little old ladies which wasn't really the case.

    The banks absolutely cannot win the PR war.

    Another analogy is like if YOU (the bank) lent money to your friend to buy a car. Both of you agree if your friend stops making payment, you get the car. All you had was your contract scribbled on a napkin. Your wife accidently threw the napkin out while cleaning up the house. However, your friend was steadily making payments to you for the car (you have the cashed checks for this of course along with a ton of other documents that clearly show you have a claim on said car - otherwise, why in the hell would your friend be sending you checks every month with "Car" written on the check). Hell, you even send him a statement.

    In the meantime, your friend loses job and stops paying you back and you decide you want the car now so you can sell it an cut your losses.

    You go to court and judge says you need to show the original napkin (even though Stevie Wonder can see you have a claim car). Instead of admitting you lost the original napkin, you just scribble up a new napkin and your wife signs your name on it.

    Your friend who is desperate this point, finds out you lost the original napkin. His attorney is able to prove you lied about the original napkin. Because of this, judge says it doesn't matter that your friend didn't pay as agreed because you lied about the napkin. In fact, because you lied, you now have to pay your friend $2000 and you also don't get the original money you lent to buy the car back.

    We know lying about the napkin was wrong, but given what you just went through, would you lend money to your other friends? Probably not. Consumers are going to suffer and mortgages are going to be more expensive.

  • "OK. I'm really curious as to what people think about this deal."

    Quite simple: if it were to help me, I'd be all for it. However, i'm not one of the special groups this might help. My understanding is I'm not actually paying for this but I suspect that isn't true. Banks might pass this cost on to their customers quietly through increased fees or reduced services.

  • In reply to darkangel:

    Correct. And if you own bank stock or mutual funds that own bank stocks or retirement plans that own bank stocks you already lost.

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