How The Latest Foreclosure Settlement Lets Banks Off The Hook (Again)

Photo by flickr user gilsonrome

Federal regulators earlier this year cut a settlement with the nation’s biggest banks that short-circuited an earlier review of foreclosure abuses. The new deal is meant to provide $9.3 billion in aid to distressed homeowners, while foregoing a thorough review process.

However, as the New York Times noted, that $9.3 billion headline number is much higher than the amount homeowners will actually receive:

Under the settlement, banks receive credit for the size of the outstanding loan balance, rather than the amount of actual assistance provided. For example, if a bank cut a borrower’s $100,000 mortgage debt by $10,000, the lender could then reduce its commitment under the settlement by $100,000. In a previous foreclosure settlement, the banks received credit only for the $10,000.

This obviously incentivizes banks to give small amounts of aid to homeowners with large mortgages, tallying the larger amount under the settlement while not providing much in the way of help. As Karen Weise detailed at Businessweek, the settlement also gives banks a helping hand in a variety of other ways.

“All in all, the settlement moves further away from compensating borrowers and actually identifying mistakes banks may have made,” she wrote. The Times notes that regulators initially “declined to attach any conditions to the assistance,” and were then steamrolled by the banks when they sought to add conditions later.

Rep. Maxine Waters (D-CA), ranking member of the House Financial Services Committee, has called for an investigation into why regulators decided to stop the prior settlement’s foreclosure reviews and instead opt for a new settlement. And this is certainly not the first time that banks have been able to get away with stiffing homeowners under the guise of a settlement. Last year’s $25 billion foreclosure fraud settlement has also been gamed by banks, while state legislators have siphoned off some of its funding for purposes other than helping homeowners.