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.

Yesterday, 49 states joined the federal government in announcing a $26 billion settlement with five of the nation’s biggest banks over the banks’ foreclosure fraud abuses. The money from the settlement is meant to aid homeowners who lost their homes to foreclosure or who find themselves underwater, meaning they owe more on their mortgage than their home is currently worth.

However, Wisconsin Gov. Scott Walker (R) — whose high profile assault on workers’ rights has prompted a recall effort against him — isn’t planning to use the money to help homeowners. Under the terms of the settlement, Wisconsin is set to receive $140 million, $31.6 million of which comes directly to the state government. And Walker is planning to use $25.6 million of that money to help balance his state’s budget:

Of a $31.6 million payment coming directly to the state government, most of that money – $25.6 million – will go to help close a budget shortfall revealed in newly released state projections. [Wisconsin Attorney General J.B. Van Hollen], whose office said he has the legal authority over the money, made the decision in consultation with Walker.

“Just like communities and individuals have been affected, the foreclosure crisis has had an effect on the state of Wisconsin, in terms of unemployment. … This will offset that damage done to the state of Wisconsin,” Walker said.

A memo from Wisconsin’s Legislative Fiscal Bureau released yesterday notes “it is anticipated that Wisconsin will receive $31.6 million. Based on discussions between the Attorney General and the administration, of the amounts received by the state, $25.6 million will be deposited to the general fund as GPR-Earned in 2011-12, and the remaining $6 million will be retained by the Department of Justice to be allocated at a later date.”

Milwaukee Mayor Tom Barrett (D) criticized Walker’s move, saying “not one dime [of the settlement] should be used to fund the unbalanced state budget.” Adding insult to injury, Walker has previously criticized using one-time settlement money to fill budget holes.

The settlement money already doesn’t come close to addressing the depths of the nation’s housing problem, though it will provide real relief to the people whom it does reach. But the money was certainly not intended to paper over state budget problems, particularly in a state whose governor assured everybody up and down that busting his state’s public unions was the key to fiscal solvency. (HT: Jessica Arp)

Today, 49 states joined the federal government in finalizing a $26 billion settlement with five of the nation’s biggest banks over the banks’ foreclosure fraud abuses. The money will be used to aid homeowners, both through direct payments and by reducing mortgage principal for homeowners who find themselves owing more on their mortgage than their home is currently worth.

In terms of the size of the housing problem, as Reuters’ Agnes T. Crane and Daniel Indiviglio noted, $26 billion is a “mathematical drop in the bucket,” considering that homeowners are underwater by some $700 billion. As far as being a knock for the banks, Nasdaq.com columnist Daniel Pereira noted that the $26 billion is about half what the four publicly traded banks involved in the settlement made in profits last year:

The $26 billion represents a significant settlement, but it clearly won’t stagger the banks too much. Together, the four banks mentioned above took in a total profit of $47.6 billion in 2011. It’s not as if the banks will be paying the settlements out of pure profits, either; they’ve all set aside a fair amount of capital to pay for their mistakes. Still it’s telling that the banks will be paying just about half of their annual profits to walk away from the foreclosure mess.

Several state attorneys general were hesitant to join the settlement, fearing that the terms were too easy on the banks and that the extent of the banks’ fraudulent activities had not been uncovered. As we noted before, the settlement protects the banks from state and federal lawsuits pertaining to some abuses, such as “robo-signing” foreclosure documents, but doesn’t prevent individuals from moving forward with their own individual actions against the banks.

While it certainly won’t be a panacea for all that ails the housing market, it will certainly help those people who, until this point, had little hope of receiving a principal reduction any other way.

Fresh off the news that government backed mortgage giant Fannie Mae knew about foreclosure fraud abuses being committed by the nation’s biggest banks as far back as 2003, but did nothing, Bloomberg News reported today that Fannie Mae also “pulled the plug” on a plan to help underwater homeowners in 2010. In a letter, Senate Democrats quote a former Fannie Mae employee who claims that the plan was ready to go, but was killed at the last moment because Fannie Mae executives were “philosophically opposed to writing down principal balances”:

A former Fannie Mae employee told the committee that the mortgage finance company had developed a pilot program for reducing mortgage debt for borrowers who owe more on their house than the property is worth.

The purpose of the plan was to develop “a responsible way to reduce principal balances for underwater mortgage borrowers without creating undue incremental moral hazard,” the employee told the committee.

The pilot had preliminary approvals from officials at Fannie Mae, FHFA, and the Office of the Comptroller of the Currency, a bank regulator, according to the former employee.

In mid-2010, two weeks before its launch, senior Fannie Mae executives cancelled the program because they were “philosophically opposed to writing down principal balances,” according to the former worker, who was quoted in the letter without being identified.

Edward DeMarco — the acting head of the Federal Housing Finance Agency, the regulator for both Fannie Mae and Freddie Mac — has also been, as one former administration official said, a “boulder” in the way of allowing the mortgage giants to reduce principal for troubled homeowners, on the grounds that it would be bad for Fannie and Freddie’s bottom line. Meanwhile, “some economists counter that while principal reductions might lead to a short-term hit for Fannie and Freddie, it would ultimately result in fewer underwater mortgages, fewer foreclosures and a healthier housing market — all good for Fannie and Freddie’s bottom line.”

The opposition to principal reductions within Fannie Mae, according to Bloomberg, seems to be much more pernicious, in that they think mortgage writedowns are an unfair bailout for homeowners. But this ignores the fact that many homeowners are underwater — owing more on their mortgage than their home is currently worth — not due to anything they did but because of the 2008 bursting of the housing bubble and the foreclosure epidemic that followed, which dragged home values down to a point from which they have yet to recover.

Republicans across the political world have struggled to comprehend the causes of the financial crisis since it began roiling the American economy nearly five years ago. Former Pennsylvania Sen. Rick Santorum (R), now one of the GOP’s two leading presidential candidates, hasn’t been immune, going all-in on the notion that government policy, government-sponsored housing programs, and government regulation were the main drivers of the crisis, a claim that has been repeatedly debunked.

On the campaign trail in Colorado this week, however, Santorum offered an even further out there explanation for the crisis. According to the Colorado Independent, Santorum told one crowd that gasoline and oil prices rose so sharply in the build-up to the collapse that they caused Americans to default on their mortgages in droves, thereby triggering the housing crisis that is still acting as a drag on the nation’s economy:

Stressing the importance for the country to provide cheap energy to its citizens, Santorum blamed the recession not on sub-prime mortgages or the derivatives market but on spiking fuel prices.

“We went into a recession in 2008. People forget why. They thought it was a housing bubble. The housing bubble was caused because of a dramatic spike in energy prices that caused the housing bubble to burst,” Santorum told the audience. “People had to pay so much money to air condition and heat their homes or pay for gasoline that they couldn’t pay their mortgage.”

The theory that rising oil prices blew up the housing market exists only in Santorum’s mind. “All The Devils Are Here,” an inside account of the crisis written by Fortune editor and columnist Bethany McLean and New York Times columnist Joe Nocera, doesn’t mention oil or gas prices a single time. New York Times financial reporter Aaron Sorkin’s “Too Big To Fail,” another inside account, never points to oil prices as a factor in the crisis. And the official government report about the crisis, the Financial Crisis Inquiry Commission Report, mentions oil prices multiple times as a symptom of the declining economy but never blames rising prices for the collapse of the housing market.

In reality, the primary cause of the financial crisis is quite clear. Mortgage lenders and large banks, driven by an insatiable thirst for profits, divvied up subprime mortgages and junk loans into mortgage backed securities, credit default options, and various forms of derivatives, then sold them around the world, creating a housing bubble that burst the minute the market overheated. Unfortunately, in their quest to prevent Wall Street banks and rogue mortgage lenders from taking responsibility, many Republicans have created an alternate reality in which anything else — even something as disconnected as fuel prices — caused the crisis, even if those claims have no basis in reality.

The Obama administration — in addition to announcing a new mortgage refinancing program, paid for by implementing a tax on the nation’s biggest banks — has introduced another round of fixes for its signature foreclosure prevention program, the Home Affordable Modification Program (HAMP). HAMP has fallen woefully short of expectations, due to a combination of design flaws, bank intransigence, and a significant amount of bank incompetence.

The new HAMP features include expanding the debt-to-income requirements for participation, paying investors more for principal reductions, and extending the program’s application deadline through 2013. According to an analysis from JP Morgan Chase, the changes should aid 500,000 homeowners:

A recent expansion of the Home Affordable Modification Program is expected to result in 500,000 mortgage modifications that otherwise would not have taken place, bank analysts said…JPMorgan Chase [[JPM]] analysts said in a report Monday they expect 1.7 million additional borrowers could qualify for the program under the more lenient DTI requirements – meaning more of their debt not just their first lien mortgage would be calculated in.

The administration’s housing programs have reached just 20 percent of the households they were supposed to, with HAMP helping 910,000 homeowners, far short of the 4 million at which it was aimed. Just a fraction of the money allocated to the program has even been spent.

“The housing crisis has been the single biggest drag on our recovery from the recession,” Obama said in his latest weekly address. “It has kept millions of families in debt and unable to spend, and it has left hundreds of thousands of construction workers out of a job.” Today, the economics bloggers at Calculated Risk predicted that the housing market it at its bottom, while “the list of housing markets showing measurable improvement expanded by 29 metros in February to 98 on the National Association of Home Builders/First American Improving Markets Index released on Monday.”

Hopefully these numbers, as well as renewed interest from the administration in aiding troubled homeowners will result in housing going from a drag on the economy to a boost.

Today is the supposed deadline for a group of attorneys general to sign onto a settlement with the nation’s biggest banks, stemming from the foreclosure fraud scandal that broke back in 2010. The settlement has been in limbo for several months, as a group of AGs believed it gave too much up to the banks in terms of immunity for mortgage misdeeds.

Part of the hesitation on the part of AG’s such as New York Attorney General Eric Schneidermann and California Attorney General Kamala Harris is that the settlement would have shortchanged investigations into the true extent of foreclosure abuses, which have reportedly gone back decades. In fact, according to a report in the New York Times over the weekend, government-backed mortgage giant Fannie Mae knew about foreclosure fraud as far back as 2003, but did nothing about it:

Even then, [Florida businessman Nye Lavalle] discovered, some loan-servicing companies that worked for Fannie Mae routinely filed false foreclosure documents, not unlike the fraudulent paperwork that has since made “robo-signing” a household term. Even then, he found, the nation’s electronic mortgage registry was playing fast and loose with the law — something that courts have belatedly recognized, too…For two years, he corresponded with Fannie executives and lawyers. Fannie later hired a Washington law firm to investigate his claims. In May 2006, that firm, using some of Mr. Lavalle’s research, issued a confidential, 147-page report corroborating many of his findings.

And there, apparently, is where it ended. There is little evidence that Fannie Mae’s management or board ever took serious action.

Schneidermann has sued Bank of America, JP Morgan Chase, and Wells Fargo for their use of a mortgage database that may have led to improper foreclosures. And evidently a look into what Fannie Mae knew about foreclosure fraud is also warranted.

Nowhere in America has the housing crisis hit harder than Nevada, the site of the next step in the Republican Party’s 2012 presidential nomination contest. While the issue of housing might be foremost in the minds of Nevadans, they have heard strikingly little from the GOP’s leading candidates.

Former Massachusetts Gov. Mitt Romney (R), for instance, told Nevadans that they shouldn’t try to stop the foreclosure process in October, a statement that earned a strong rebuke from Gov. Brian Sandoval (R) and other state Republicans. After seemingly changing his position on housing in Florida, another state that has been ravaged by foreclosures and falling home prices, Romney has mostly avoided the subject since coming to Nevada.

Letting “markets work,” however, isn’t likely to help the Nevadans who are struggling to deal with falling home prices, high foreclosure rates, and underwater mortgages. With that in mind, here’s a look at just how hard the housing crisis has hit the state:

60: Consecutive months that Nevada has led the nation in foreclosures.

177: One in every 177 Nevada homes was in foreclosure in December 2011. Nationally, 1 of every 634 homes is in foreclosure.

58: Percent of Nevada homeowners that are underwater — meaning they owe more than their home is worth. The national average is 22.1 percent.

10.6: Percent drop in Nevada home prices in 2011, the second-worst rate in the nation.

167,000: Number of vacant Nevada homes. The rate of vacancies, about 1-in-7, has doubled since 2000.

1: Las Vegas’ rank among the worst cities for foreclosures. One of every 150 Las Vegas homes is in foreclosure, the highest rate in the nation. Two-thirds of the city’s homeowners are underwater.

9.1: Percent drop in Las Vegas home values since November 2010, the second-worst performance of the 20 cities surveyed by Case Shiller and Standard & Poor’s.

70: Percent of homes in foreclosure in one Summerlin, Nevada ZIP code, according to local real estate agents.

89031: The North Las Vegas ZIP code that is the worst in the nation for foreclosures. The five worst ZIP codes for foreclosures are all in Las Vegas.