The first step toward a California housing recovery has been taken, in the form of the mid-February legal settlement between 49 states and the five large banks that were the leading culprits in the years of mortgage fraud that created a price bubble and convinced many thousands of homeowners to take on high-value mortgages.
The settlement is for at least $25 billion and could go as high as $45 billion, with Californians getting more than one-third of the benefits, or as much as $18 billion.
No, $18 billion in cash will not suddenly pour into the state’s economy. Actual cash should amount to no more than about $5 billion, still a pretty hefty amount.
But the first step toward reversing the effects of the foreclosure tide that swept over tens of thousands of homes is to stop the bleeding by calling a halt to the constant increase in the inventory of existing homes that are either on the market or about to enter it. It’s the massive number of houses and condominiums involved that has driven home prices down, placing many thousands of homeowners “under water,” with their properties worth less than the bank loans on them.
The 49-state settlement has been criticized on two scores: 1) That it is not big enough, that insufficient cash will flow to homeowners bilked out of down payments that in some cases amounted to many thousands of dollars, and 2) That California is getting too large a share of the settlement.
The second of those gripes is the more absurd. California gets the lion’s share of the settlement because this is where the largest portion of the abuses occurred. Some critics who claim the state’s share of the new pot is too high also assert the settlement is designed to assuage California’s chronic state budget deficits and that bank customers in other states will be dunned to pay for it via new fees.
No and no. Less than $1 billion of the money coming to California will go to the state itself, and that money will pay for new banking regulatory programs, the big banks’ money appropriately being used to police those same banks and others. If there’s to be significant help for the state budget, it will have to come via increased sales and income taxes as housing-related businesses begin to recover or through rises in property taxes if sales prices increase. Nor will bank customers pay: Bank of America (one of the banks in the settlement) tried upping its fees earlier this year and lost both large numbers of customers and epic amounts of good will.
How will all this actually work? B of A, Wells Fargo, Citibank, JP Morgan Chase and Ally Financial (formerly GMAC) will actually pay out only $5 billion nationally in cash, including $1.5 billion to homeowners who were foreclosed upon illegally.
The cash in the settlement goes to about 750,000 of the two million homeowners foreclosed on in the past four years, each getting a check for $2,000. Small redress, indeed, for the ordeal most have gone through and the improper fees often fraudulently charged to homeowners, plus the way the big banks sometimes foisted property insurance on borrowers at up to three times the prevailing rates.
But relatively little cash will end up here, because the illegal robo-signings used in many foreclosures were never common in California.
The lion’s share of the settlement amount will come in reduced loan balances, with about 250,000 California homeowners due to get $12 billion in loan write-downs. Other kinds of credits could go to another 210,000 homeowners in parts of the state hit hardest by the housing bust.
This is where the foreclosure tide should start to peter out. It could also help the banks, which have reported the average foreclosure costs them $60,000 in maintenance costs, repairs and brokerage fees.
By writing down loans that most likely would soon turn bad, banks will save expenses while allowing thousands of homeowners to get their heads above water again. Once that happens, there should be little motive for borrowers to desert their houses, as many have done upon concluding that the value of their properties declined so far that they could not in the foreseeable future rise above their loan amounts.
By cutting loan amounts, the banks achieve the same goal outlined in a congressional proposal which would have allowed under-water homeowners to pay no interest for five years, with regular payments going strictly toward principal reduction.
All this is only a step along the path to recovery, but it’s the first significant one – a point almost completely ignored by most critics.
