House Financial Services Chairman Spencer Bachus (R-AL) explained in December that, in his view, Washington’s role is “to serve the banks.” The rest of the Republicans on his committee have embraced that mantra wholeheartedly, trying to roll back key parts of the Dodd-Frank financial reform law while collecting big donations from the financial services industry.
To that end, Republicans are riding to the aid of the country’s biggest mortgage servicers, which are currently negotiating a settlement with a bi-partisan group of attorneys general over abuses that came to light during the foreclosure fraud scandal (including the widespread use of “robo-signers“).
The AGs have suggested having the banks pay a penalty by reducing loan principal for troubled homeowners by a certain amount (potentially $20 billion). But Republicans in both the House and the Senate, as well as eight Republican attorneys general, have sided with the banks against homeowners, saying that the banks should not be forced to pay for their past misdeeds.
Previously, Republicans just derided the proposed settlement as a “shakedown,” but now they have a new reason for supporting the interests of banks over homeowners. According to a letter sent to U.S. Attorney General Eric Holder by four Republicans on the Financial Services Committee, reducing loans for troubled homeowners could impede the economic recovery:
“The settlement approach being pursued — which ignores Congressional prerogatives and bypasses the legislative process — is unwise policy and potentially unlawful,” the lawmakers said in the letter…“We have concerns about the potential terms of the servicing settlement because, among other things, we believe that a $20 billion principal reduction fund will create incentives to default that could worsen the housing crisis and impede economic recovery.“
However, as Center for American Progress housing policy consultant Alon Cohen noted, a foreclosure costs a servicer roughly $59,000 in filing fees, legal services, and maintenance of the foreclosed-upon property. Each foreclosure, in addition to the obvious damage to the former homeowner, also causes surrounding homes to lose one to 1.5 percent of their value and lowers tax revenue for the community. Keeping homeowners in their homes prevents all of those negative consequences, and a recent report from the International Monetary Fund showed that the effect of more aggressive loan reductions on bank balance sheets “is likely to be limited.”
At the moment, nearly 30 percent of homeowners are underwater on the mortgages — meaning they owe more than their home is currently worth — and housing prices last quarter showed their largest drop since 2008. Clearly, foreclosure relief is desperately needed, but House Republicans are siding with the banks, potentially leaving homeowners with one less avenue for aid.