In response to the the “robo-signing” scandal and other mortgage abuses perpetrated by the nation’s biggest banks, a group of state attorneys general have floated a settlement that would involve the banks writing down $20 billion in underwater mortgages, in exchange for avoiding litigation. (Underwater homeowners owe more on their mortgage than their house is currently worth.) The effort is being led by Iowa Attorney General Tom Miller (D).
The banks, of course, have cried bloody murder over the proposed settlement, calling it a “naked shakedown” by regulators. Congressional Republicans parroted the banks’ language, and one Republican attorney general, Ken Cuccinelli (VA), broke with his colleagues and likened the idea of reducing mortgage principle for underwater homeowners to “welfare.”
Now, six more Republican attorneys general have sided with the banks and against homeowners. First, attorneys general Greg Abbott (R-TX), Pam Bondi (R-FL), and Alan Wilson (R-SC) co-signed a letter with Cuccinelli objecting to the mortgage modification portion of the settlement:
Yesterday’s letter, a copy of which was obtained by Bloomberg News, was signed by attorneys general Kenneth Cuccinelli of Virginia, Greg Abbott of Texas, Pam Bondi of Florida and Alan Wilson of South Carolina…The settlement offer “appears to reach well beyond the scope of our enforcement role, and, in some instances, far exceeds the scope of the misconduct which was the subject of our original investigation,” according to the letter, which was verified by Brian Gottstein, a spokesman for Cuccinelli.
A key objection is the “moral hazard” created by the proposal to reduce homebuyers’ loans because it “rewards those who simply choose not to pay their mortgage,” the attorneys general said.
The Republican attorneys general of Oklahoma, Alabama and Nebraska sent a similar letter last week. In reality, the proposed settlement lets the banks off too easy, as $20 billion in mortgage reductions won’t actually go that far, considering the extent of damage the housing market has suffered.
Many homeowners are underwater through no fault of their own: Wall Street malfeasance and a lack of prudent regulation caused a housing bubble to grow and burst, plunging home prices steeply downward. Also, as Paul Krugman noted, the settlement only calls for modifications that benefit bank and homeowners alike:
The proposed settlement only calls for loan modifications that would produce a greater “net present value” than foreclosure — that is, for offering deals that are in the interest of both homeowners and investors. The outrageous truth is that in many cases banks are blocking such mutually beneficial deals, so that they can continue to extract fees.
But even this modest proposal has earned nothing but scorn from Republicans, who are once again content with allowing Wall Street to avoid paying for its sins.