You can put lipstick on a pig, but it is still a pig. This settlement is meaningless and as the details are released, I will bet that a very small percentage of homeowners in Utah will be able to benefit. 

It is finally out — California and New York have both signed on so the U.S. Department of Justice can move forward with the mortgage settlement between it, the attorney generals of most of the 50 states, and the nation’s biggest banks. The value of the deal is being touted at $26.0 billion right now. If additional parties sign on to the deal, it could be worth up to $45.0 billion. According to the Salt Lake Tribune article on the topic, Utah will get $25 million as part of the settlement. But what does that mean to you?

Not a whole lot it turns out. If you were foreclosed on between January 2008 and December 2011 you may be eligible for a payment of up to $1,800. Some of the articles that I have read on the topic are saying that the banks have up to three years to pay you that amount. If you are current on your mortgage and your owe less than what your mortgage balance is, you get nothing.

Then there are the people who are underwater on their homes. A specific formula has been developed to help banks calculate how much will be written down on the loans. The details that have been published so far indicate the bigger the difference between what you owe and what your home is worth, the more you will be eligible for. The amount has been capped at $20,000.00. So what value is it to someone who is let’s say $100,000 underwater on their loan?

I have several issues with how this package is being pitched by the Obama Administration. The main tagline for the national mortgage settlement is that it, “rights the wrongs of the housing bubble collapse and corrects what was done to homeowners”. Damn it Eric Holder — he is the U.S. Attorney General — you really didn’t accomplish much on this one. The agreement actually does none of those. Is it the fault of the banks that the value of homes were so inflated and once they came down most people lost money? Is it the fault of the banks that people over-extended themselves and bought homes based on what they felt was future potential earnings? Homeowners who have bitten the bullet as their home values have fallen and kept up on their payments get nothing in this deal. So unless you are significantly underwater on your loan — like in the range of 25-50% — then do not expect to see any benefit from this program.

There is a very small percentage of home owners who will be eligible for principle write-downs. 1.0 million homes are estimated to be eligible to participate. Compare that with the total of 75.0 million homes in the country, and that makes only 1.3% of homes in the U.S. eligible. This program does nothing for the majority of homes. So if you made a large down payment or have been paying additional money on your loan for the last couple of years, then you get nothing. Banking analyst Dick Bove – who is not a fan of the settlement — said, “There is no sanctity of contracts in the United States. Only fools meet their financial commitments. The non-payers are the truly enlightened.”

As a matter of fact, you will be hurt by this deal. Think about it — your neighbors who take advantage of the loan balance reduction will hurt the value of homes in your area, yours included. On top of that, while the banks and mortgage servicers are paying for this settlement, do you really think they will absorb the cost of the settlement and just walk away and say, “Oops! Our bad.”? You better believe the cost of the settlement will be passed on to you and I. The cost of funds will increase because of additional fees to help decrease risk for the banks when making a mortgage loan. I also think that unless you have a government guaranteed loan like an FHA or VA loan, in the future you will be required to put 20% down on the purchase of a home. Mark my words — down payment requirements will increase as mortgage lenders try to decrease the probability that a homeowner will walk away from their home if they owe more than the home is worth.

The original investigation was designed to determine how due process was violated by big banks during the foreclosure process through actions like “robosigning”. To address that issue, the DoJ placed the $1800 settlement for homeowners who were foreclosed on into the agreement. Personally I think the payment should only go to those people who had some type of adverse action on their account, but that is a discussion for another day.

As for the rest of the settlement, it has turned into a old dog that is losing its hair, has already lost all of its teeth, and is so arthritic it can hardly move around. The components of the agreement that provide for principle reduction will only apply to 1.3% of the homes in the country. Does that sound familiar? Remember the Home Affordable program? Remember all of the other programs designed to help homeowners refinance? This is just another in a long list of programs that the Obama Administration will parade out as their attempt to fix the housing mess.

Related Topics:

Buy a Home in Utah
Utah Mortgage Advice
Refinancing My Utah Mortgage