Bank deal: Foreclosure settlement won’t accomplish much

Nevada Attorney General Catherine Cortez Masto and her peers across the country, who’ve long sought their pound of flesh from the banking industry for its role in the Great Recession, finally might have a deal. A draft settlement between five major financial institutions and the states has been sent to attorneys general for review and could be approved within weeks.

Does the $25 billion agreement hit the banks where it hurts? Absolutely. Will it do anything to speed an economic recovery, strengthen the housing market and put Americans back to work? No, no and no. If anything, it might prolong our misery by making mortgages more expensive and further dragging out an already interminable foreclosure process.

The settlement, which would be the largest shakedown of a single industry since tobacco companies emptied their bank accounts 14 years ago, is purportedly for deceptive foreclosure practices that forced people from their homes. (The fact that they had stopped paying their mortgages apparently had nothing to do with those evictions).

But the deal has very little nexus between wrongdoing and remedy. An estimated 750,000 borrowers who were booted from their homes sooner than they should have been would collect about $1,800 each. Beyond that, some $17 billion would be used by lenders to reduce the mortgage principal for up to 1 million homeowners, and about $3 billion would let select homeowners refinance at an interest rate of 5.25 percent.

This settlement doesn’t address so-called "predatory lending" or the subprime loans that helped inflate the housing bubble. This is supposed to be about protecting the integrity of the foreclosure process. So why are lenders writing down mortgages and refinancing borrowers, when federal programs created to accomplish the same goals have been pathetically ineffective at keeping homes out of foreclosure? News flash: A borrower who doesn’t have a job won’t be able to pay even a reduced mortgage payment.

Moreover, the settlement applies only to mortgages issued between 2008 and 2011 and currently held by lenders, not government-controlled black holes Fannie Mae and Freddie Mac. The housing bubble burst in 2007. A mortgage written in 2004 is far more likely to be underwater than one issued in 2010. And interest rates have been low over the past few years. Why would someone who obtained a 5 percent mortgage in 2009 want to refinance at 5.25 percent in 2012?

So what qualification standards will determine the lucky few who’ll get a handout? Those details will be decided later.

Yes, banks are an entirely unsympathetic lot, and they’ve been as responsive to the housing crisis as a patient in a coma. But government-coerced bailouts of select citizens is no way to encourage investment and grow the economy. At some point, we are going to have to stop pointing fingers and seeking punishment and start thinking about how to make things better. The longer it takes for foreclosures to run their course — it currently takes, on average, a year to complete the process in Nevada — the longer we’ll wait for our homes to again appreciate.

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