The Housing Settlement Travesty

The National Mortgage Settlement was finally filed yesterday. The long-awaited details of what was agreed to by the banks is in the documents. I immediately began receiving emails from real estate professionals asking for my assessment of the contents.

When I sat down this morning to gather up pertinent URLs to provide in this column I was surprised but happy to see that some of the mainstream press had already written about the settlement in very frank terms.

CNN put it most succinctly this morning in the column "Rage grows over mortgage deal".

I will add to that assessment that the deal is, in my opinion, an abomination. Booleanizing the agreement, it awards the banks for writing down principal balances of mortgages they hold for rich folks, while penalizing them for doing the same for poor folks.

It doesn't say that exactly, but it's pretty darned close. The agreement specifically provides benefits to the banks for writing down the principal balances of mortgages they hold in their portfolio. These are loans they both own and service. Portfolio mortgages are overwhelmingly loans that are made through a bank's private banking operations to its most profitable clients.

From the perspective of political pragmatism, I did not find this surprising. However, the agreement goes further by way of penalizing banks for applying proceeds of the settlement to writing down the principal balances of loans they service but that have been sold into mortgage-backed securities (MBS).

I found this discouragement to be the most astounding. It was overkill, unnecessary and never should have been put down in writing. Even without this restriction, the banks would have been easily able to allocate their portion of the settlement to award their best clients, and, as such, MBS investors had nothing to worry about. The agreement also precluded the banks from providing principal writedowns on loans held by Fannie Mae and Freddie Mac or that were originated through the Federal Housing Authority (FHA).

What is most bothersome about this is that apparently few (if any) of the people involved in structuring or agreeing to these terms were aware that they are in contravention to the reason for the settlement itself. One of the chief rationales for this settlement was the robo-signing controversy, which involved mortgages that had been sold into mortgage-backed securities. The aggrieved parties have not only been precluded from the settlement but have now also been abused again because they are being used as an excuse for the banks to award high-end mortgagors who were unaffected by the actions of the banks.

Stating that the agreement is farcical is not a stretch. The biggest concern is that it was able to get all the way through the legal, regulatory and judicial systems without there ever having been public discourse on what it would entail. Plus, apparently nobody involved was aware that this would become an issue with mortgagors, or -- more importantly, given that this is an election year -- with voters.

Further, this agreement bears no resemblance to what has been discussed and promised by the banks, regulators, Congress and the Obama Administration going back to last summer.

The website set up for the administration of the program and dissemination of the information to homeowners also provides no overt notification as to the issues on allocation of resources I've mentioned above. In fact, the website is almost useless. At least the mortgagors who will be afforded the funds for principal reductions, for the most part, will not need a website. The banks will proactively contact them and get their loans restructured.

Equity investors, however, think the agreement is fantastic because the stock prices for all of the signatories are up today: Bank of America (BAC) by 1.6%, Wells Fargo (WFC) by 1%, JPMorgan (JPM) by 2% and Citibank (C) by more than 3%.

The bottom line for the economy is that this agreement provides nothing that will help stop the decline in home values, preclude foreclosures, increase confidence or stimulate home buying activity.