Is The Foreclosure Fraud Settlement Really Just ‘A Drop In The Bucket’?

Our guest blogger is David Min, Associate Director for Financial Markets Policy at the Center for American Progress Action Fund.

Critics of the mortgage settlement negotiated between the state attorneys general and five of the nation’s biggest banks have claimed that the $25 billion settlement is merely a drop in the bucket compared to the size of the overall housing market problems. But is this a fair characterization?

The settlement will help over a million households, and provide $25 billion in relief to struggling homeowners, including an average of more than $20,000 in principal reduction for approximately one million homeowners. This appears to be a relatively small number of homeowners being helped when compared with the 11 million households that are currently “underwater,” owing a total of $699 billion more on their mortgages than their homes are worth.

But this simple comparison ignores the fact that this settlement is limited to mortgages that were originated for private label securitization. According to the Federal Housing Finance Agency, approximately 35 percent of the nine million loans originated for Wall Street securitization are currently underwater, with an average negative equity balance of about $50,000.

In other words, one in three underwater homeowners with a mortgage originated for Wall Street securitization is going to receive loan forgiveness equal to nearly half of their negative equity.

Critics are also ignoring the fact that the settlement is narrowly tailored to claims around robo-signing and other foreclosure process violations, claims which have very uncertain litigation value and would have taken a long time to resolve. Under the terms of this deal, state and federal prosecutors are free to pursue all other mortgage fraud claims, of which there are many. As the banks themselves understand, they are still subject to an enormous amount of potential liability around their past and present wrongdoings.

When we take these items into consideration, yesterday’s settlement seems like a lot bigger deal than most of the critics are willing to acknowledge. Certainly, the state AG settlement is not a solution to the problems of the housing market, but it is clearly a good and important step towards rectifying the problems of the housing market and holding accountable those responsible.