Homeowner settlement still may not turn housing market around, experts say

Federal and state officials announced Thursday the largest agreement yet to address the effects of the housing crisis, in which five of the nation's largest banks will pay $26 billion to help current and former homeowners. The deal aims to hold banks accountable for abusive foreclosure practices and to give a boost to the still-struggling housing sector.

The deal, President Obama said, will make it possible to "begin to turn the page on an era of recklessness that has left so much damage in its wake."

But the wider response to the agreement has been mixed, with some housing experts saying it doesn't do enough to get the housing market--whose ongoing woes continue to exert a major drag on the broader economy--back on track. "It doesn't seem like it'll have a huge impact," said Ted Gayer, a housing expert at the Brookings Institution.

The plan, described by President Obama as "the largest joint federal-state settlement in our nation's history," is the product of a partnership between the U.S. Justice Department and a coalition of state attorneys general. It came out of a probe launched after evidence emerged in 2010 that major mortgage lenders relied on a host of improper practices-- including the use of "robo-signers" who signed foreclosure documents without reading them--to speed struggling borrowers from their homes.

The settlement's centerpiece is a $17 billion payout to reduce the principal payments owed by existing homeowners who are "underwater" on their mortgage, meaning they owe more on their mortgage than their home is worth. (The total value of the package could end up as high as $34 billion, based on how its applied.) Federal officials have said up to 1 million underwater homeowners will get an average of around $20,000 in relief in the form of reduced debt on their home.

Under the deal, $4.5 billion will go to allow other underwater homeowners to refinance their loans at lower rates, and to cover the reduced interest payments that the banks will receive thanks to those lower rates. And an additional $1.5 billion will provide checks of around $2,000 each to about 750,000 people who have already lost their homes over the last three years. The banks--Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial--will also make payments to state and federal regulatory authorities.

And they're not off the hook yet. The final deal cheered homeowner advocates by offering only very limited legal liability to banks. This was a key sticking point in negotiations, and potentially paves the way for additional civil or criminal investigations into the banks' role in the mortgage crisis.
As for the impact on the housing market, David Min, a housing expert at the Center for American Progress, a liberal Washington think tank with ties to the Obama administration, described himself as "optimistic."

"Twenty-five billion seems like an enormous sum given the range of claims being covered," he told Yahoo News. "Up to a million [people] who may have been foreclosed upon in the next couple years are more likely to stay in their homes. That means less supply in the market, and less foreclosure in the neighborhood, which lowers the prices of neighborhood homes."

Min said one reason for his optimism is that most of the help for existing homeowners comes in the form of principal reductions. The administration's past efforts to address the housing crisis, which have generally been seen as unsuccessful, have instead allowed homeowners to defer payments.

"Principal reductions have a better record of keeping homeowners in their homes," said Min.

But Gayer, the co-director of the economic studies program at Brookings, was far less bullish.

"Given the scope of the problem, it doesn't seem like its going to have a huge impact," Gayer told Yahoo News.

"You've got 11 million people underwater," Gayer continued. "They say [aid] will go to 1 million. That's a decent number, but it's not huge."

And some homeowner advocates said the $1.5 billion set aside for past victims of foreclosure is inadequate. "While this money will provide some help to some homeowners, this amount is not nearly enough to compensate homeowners for their losses caused by the irresponsible and predatory behavior of Wall Street banks," the Campaign for a Fair Settlement, a coalition of liberal and community groups, said in a statement.

Even President Obama sounded a note of caution in touting the impact of the deal. "No action, no matter how meaningful, is going to by itself entirely deal with the housing market," he said. "But this settlement is a start."

Despite improved economic news on other fronts, home prices declined by 1.3 percent in November 2011, the Case-Schiller home price index found last week. It was the third consecutive month to show a decline. Home prices are now down to where they were in mid 2003.

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