Helping homeowners avoid foreclosure has proven to be hard work. Banks may then start helping homeowners beyond the settlement’s boundaries and fundamentally change their business model. If the settlement makes them build better infrastructure and tools for communicating with homeowners and rewriting loans, it reduces barriers of costs and inconvenience. If the banks are forced to give principal modifications to a small group of homeowners in a fast and cost-effective way, they may finally see that such relief reduces the odds of delinquency and improves their recovery. But like a vaccine, if enough people are helped rapidly enough by the settlement, the beneficial effects can multiply. The better analogy for the settlement is to a vaccine that will protect a relatively small group of homeowners from the harms of home loss. On its face, that is not the adrenaline shot to the housing market that our economy needs. The settlement excludes all loans owned by Fannie Mae and Freddie Mac, and helps less than one in ten of the 14 million homeowners that RealtyTrac reports is in foreclosure, behind on payments, or owes more than their home is worth. Without transparent data on whether the banks are holding up their end of the deal, the public will not have confidence that this deal is a reliable sign that the housing problems of the past are in the rearview mirror.Įnforcement is also the fuel that could size up the settlement so that its effects are big enough to be felt in the economy. Those enforcement provisions of the settlement are more important than the amount of money to be paid to consumers.
It is getting that favorable rule to actually produce the desired results on the ground. The trick of consumer law is not getting a favorable rule enacted. The government needs to stay focused on this deal and make sure those tools are deployed. It requires an independent outside monitor to report on the banks’ compliance and imposes substantial financial penalties if the banks do not deliver the relief promised in the settlement.
The settlement recognizes the problem of the banks’ mindset. Paperwork still gets lost consumers still are unable to get a straight answer on eligibility for programs and foreclosure rescue scams still flourish because desperate homeowners have nowhere else to turn on the eve of losing their homes. Four years of nagging from the federal government has not led the mortgage servicers to make the needed changes. The success of the settlement rests on attorneys general making sure that the banks’ careless and callous practices have been replaced with the ability to respond efficiently and fairly to troubled homeowners. And it took the government years to admit there was a problem, despite advocates and scholars pointing out illegalities in foreclosure. When the housing crisis hit, the banks lacked the necessary staff, technology, or most importantly, an ethos of helping homeowners. For years, banks used shortcuts to reduce costs and wrench extra dollars of profit from servicing contracts. Mortgage servicers were unwilling or unable to obey clear laws. The failure to follow rules is what led to the investigation. What matters is what the banks do – and what the government makes them do – not the promises on paper and at press conferences. The effectiveness of the settlement is going to turn on its enforcement.
Will the attorneys general’s effort to address the mortgage mess be the one that actually works? Remember that President Obama heralded the Home Affordable Modification Program as being able to help 3 million to 4 million homeowners, and three years later, only 750,000 have received loan modifications. Repeatedly, programs to help troubled homeowners have fallen short of the mark. Those numbers may be too rosy, however, given the realities of the housing market. The deal sounds impressive: a $25 billion price tag an estimated 1.5 million homeowners to receive some form of relief and a sign-on by 49 states and the federal government to the deal. The nation’s attorneys general and the largest banks have settled their dispute over robo-signing and other legal violations in the foreclosure process.
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