The banking industry and its conservative allies in Congress have been complaining about a proposed settlement that would involve the nation’s biggest banks reducing loan principal for troubled homeowners, in exchange for avoiding litigation pertaining to the “robo-signing” scandal and other mortgage servicing misdeeds. Bank of America CEO Brian Moynihan whined about the proposed settlement’s fairness, while other bank executives have called it a “naked shakedown.”
Wells Fargo CEO John Stumpf is also criticizing the proposed settlement. His justification for doing so is that helping troubled homeowners avoid foreclosure might increase the federal deficit:
On Thursday, Wells Fargo & Co. Chief Executive John Stumpf said extensive loan principal reduction would increase the U.S. deficit if taxpayers are forced to pay for write-downs of loans held by government-controlled Fannie Mae and Freddie Mac. “It’s important to the country so that whatever happens does not slow down the recovery,” Mr. Stumpf said.
Former White House housing adviser and current CAP senior fellow Peter Swire said that the banks’ argument “boils down to the view that they should get away with all their mistakes because they’re too hard to fix now.” Indeed, Stumpf doesn’t want to agree to more foreclosure prevention, and is taking advantage of the political class’ obsession with the deficit to achieve that end.
But while some of the principal reductions would surely occur on loans held by Fannie and Freddie loans, many would be on loans held by private investors, not the government, so would have no effect on the deficit. Furthermore, keeping people in their homes, as opposed to foreclosing on them, has a positive effect both on the local economy and for those holding the loan (particularly with the current glut of housing on the market).
Plus, the main factor driving the short-term deficit is that there was a Great Recession, caused in large part by malfeasance on Wall Street. As a result of excess on the part of Wells Fargo and the nation’s other banking giants, a housing bubble grew and burst, throwing millions out of work, driving tax revenues to their lowest level in 60 years, increasing social safety net payments, and necessitating hundreds of billions in taxpayer dollars to be spent rescuing the financial system. Hence, the nation has very large short-term deficits.
Wells Fargo’s federal bailout of $25 billion was worth more than the entire proposed foreclosure fraud settlement. Reducing loan principal for troubled homeowners, meanwhile, will allow them to stabilize for the long-term, reduce their debt, begin spending again, and thus create demand and drive the economic recovery.