The $25 billion mortgage relief agreement announced by states' attorneys general and the Obama administration last week marks the broadest effort so far to help homeowners with underwater mortgages and others who were forced into foreclosure in the housing bust that has haunted the economy since 2007. But though it is broad enough to leverage similar aid for homeowners whose mortgage lenders are not covered by the agreement, it is no panacea for what ails the housing market and its persistent drag on economic growth.
The bulk of the aid to be distributed under the program will go for restructured loans and write-downs for one million homeowners, or roughly 10 percent of the nation's homeowners who are stuck with mortgages that are higher than the current market value of their home. An additional 750,000 homeowners will qualify for payments, averaging around $2,000, to mitigate their losses through foreclosures that remain under a legal cloud. Most of these involve so-called "robo signing" of mortgage foreclosures by banks that failed to adhere to legal guidelines for directing foreclosure.
The five banks that agreed to the $25 billion mortgage relief package include the Bank of America ($11.8 billion), Well Fargo ($5.4 billion), JPMorgan Chase ($5.3 billion), Citigroup ($2.2 billion), and Ally ($310 million). Bank of America will give an additional $1 billion for Federal Housing Administration loans.
If another nine banks join the agreement, as anticipated, the relief value would rise to $30 billion. Analysts say the model could spur additional banks to provide loan modifications for stressed homeowners. That would further help stabilize the housing market.
What remains to be done is a tall order. Fannie Mae and Freddie Mac, the two government mortgage giants that hold about half of the nation's 48.5 million mortgages, have so far refused to embark on large scale write-downs of the principle value of underwater mortgages. There is some reason for that. Reducing the value of mortgages' principle amount could increase costs to taxpayers in the long term. The counter argument is that restructuring loans would provide more cash-in-hand to consumers whose revived spending would spur the consumer economy, creating new jobs and higher tax revenue.
That issue aside, the new settlement serves the public well in several ways. It provides a model for large banks, many of which are sitting on the sidelines with big cash reserves and refusing to make the sort of ordinary loans that would drive recovery, to return some value to the economy from the home loans they kited in the housing bubble. The mortgage relief program also leaves the administration's housing fraud squad the latitude to probe for criminal fraud offenses in the assembly of mortgage securities that many big investment and commercial banks knowingly stuffed with toxic mortgages, and then took profitable bets against them.
Banks and investment houses made fortunes off such securities in the housing bubble, yet few have been brought to justice for what would commonly be described as fraud. Banks that contributed to the housing bust should not escape unscathed. More pressure is due to coerce banks for mortgage modifications and give-backs to misled homebuyers and mortgage investors.