February 21, 2012
In his column on the mortgage settlement last weekend Joe Nocera praised the fact that it would mean that more people would be able to stay in their homes and that some compensation will be paid to foreclosed homeowners in situations where the banks did not follow the rules. He also criticized those on the left who criticized the deal “before the ink was dry.”
Of course there was a reason to criticize the deal before the ink was dry. The settlement was announced before it was actually finalized. That meant that if the critics wanted to get their views into the same news cycle they had no choice except to criticize a settlement before the ink was even wet. Nocera’s criticism would be better directed at the attorneys general’s effort to manipulate the news coverage of the settlement.
There are many issues that can be debated about the settlement, but there are three big ones that stand out:
1) It is not clear what baseline is being used to determine how much is being paid. The banks are already doing some amount of modifications, principal reductions, and short sales. It is not clear how it will be determined that they are going beyond what they would have done anyhow as a result of the settlement. This means that it will be difficult to determine that the $17 billion in write-downs stipulated in the settlement have actually taken place.
2) The banks will be able to count write-downs of loans that they are servicing against this sum. These losses will come out of the pockets of the investors in mortgage backed securities, not the banks’ pockets. This means that the defendant in a civil case is effectively being allowed to pay its penalty with someone else’s money. This is at the least unusual.
3) It is far from clear that the foreclosure abuses that are the basis for the case have been put to an end. An audit of 400 recent foreclosures conducted in San Francisco County indicates that abuses are still pervasive. It is unclear that the servicers are prepared to change their practices and that the attorneys general will take further steps if they do not.
There are many other reasons for criticizing the settlement, but those are my big three. These points were not acknowledged in Nocera’s column praising the settlement.
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