At this writing, the federal government and forty-nine state attorneys general (all minus Oklahoma) have agreed to a settlement with the nation's five largest banks for their fraudulent robosigning practices. The banks will pay $5 billion penalty as part of this deal and also provide a vary range of credits which could account for another $20 billion. David Dayen at FireDogLake has the best rundown of what is in the deal, based on his own reporting and mainstream outlets. Dayen gives the breakdown:
$3 billion will go toward refinancing for current borrowers who are underwater on their loans, as well as short sales. $5 billion will go as a hard cash penalty to the states, which can use them for legal aid services, foreclosure mitigation programs, and ongoing fraud investigations in other areas (one official close to the talks feared that much of that hard cash payout will go in some Republican states toward filling their budget holes). The federal government will get a cash penalty as well. Out of that $5 billion, up to 750,000 borrowers wrongfully foreclosed upon will get a $1,800-$2,000 check if they sign up for it, the equivalent of saying to them “sorry we stole your home, here’s two months rent.”
The bulk of the money, around $17 billion, will go to principal reduction credits for troubled borrowers. The banks will not get dollar-for-dollar credit for every write-down; reductions on loans bundled in private-label mortgage-backed securities, for example, will be under 50 cents on the dollar, and write-downs for second liens (mostly home equity lines of credit) will be more like 10 cents. Housing and Urban Development Secretary Shaun Donovan believes that they will be able to get between $35-$40 billion in principal reduction in real dollars out of the settlement. Donovan became the point person on the federal level, along with DoJ, as the Administration pretty much took over the investigation and settlement process from the states, who were led by Iowa AG Tom Miller.
But even this $35-$40 billion number, which is at best a guess since the direction of the principal reduction is mostly at the discretion of the banks, pales in comparison to the negative equity in the country, which sits at $700 billion. And the banks have three years to implement the principal reductions, drawing out the loss on their books. [Emphasis added]
Look at the section in bold. What this settlement says is that if the bank stole your home - and according to the deal, banks did this to 750,000 American families (though in reality the number is much higher) - the banks will get off scot-free for $2,000. Can you imagine the Department of Justice arresting a bank robber who stole $180,000 and letting him go as long as he returned $2,000? Wouldn't we all be bank robbers if such was the state of justice? This is quite possible the most insulting, if not the most problematic, aspect of the deal.
Dayen goes on to note that at its best, this deal will provide an almost certainly insufficient amount of principle reduction to a small fraction of underwater homeowners: "you’re talking about $20,000 (when homes are on average underwater $50,000) for 1 million borrowers (when there are 11 million underwater)." Given that being underwater is the single largest predictor of foreclosure, making someone 40% less underwater is no panacea.
If you want a much deeper analysis of the reasons why this is a bad deal, Yves Smith is a good starting place. She identifies twelve reasons to hate the settlement and frankly it's just the tip of the iceberg as we have yet to see the text of the deal. One that is surely worth noting, though, is:
That $20 billion actually makes bank second liens sounder, so this deal is a stealth bailout that strengthens bank balance sheets at the expense of the broader public.
Gee, and here I was just thinking the other day, "Wouldn't it be great for America if we had another bank bailout?"
The actual settlement has not been released and likely will not be released until it is filed in federal court. This lack of transparency is actually a fundamental problem, in part because the majority of the money that is in this deal will not be coming from the banks who agreed to it, but from their investors (including 401ks, public and private pension funds). The less time this agreement is fully in public before being filed in court, the less time investors will have to object to its terms.
Smith concludes her post with an important observation:
As we’ve said before, this settlement is yet another raw demonstration of who wields power in America, and it isn’t you and me. It’s bad enough to see these negotiations come to their predictable, sorry outcome. It adds insult to injury to see some try to depict it as a win for long suffering, still abused homeowners.
The fix has been in for a long time, though it was delayed because a number of Attorneys General wouldn't agree to the direction things were heading. We are told that they are now on board because the settlement is sufficiently narrow in scope (though, again, both Dayen and Smith highlight some ways in which that is not believable). Until we see the actual settlement, it's impossible to know whether this is truly narrow in scope. But even if it is, the idea that there be any immunity as part of any settlement of any area of criminal behavior which has not been fully investigated is a heartbreaking testament of the failures of system of justice.
As the sign at Occupy Wall Street said, this sh*t is f'd up and bullshit.