Federal and state officials were proud to announce a $25 billion settlement with banks to help troubled homeowners who are underwater or who have lost their home to foreclosure. The way the lawmakers sounded, you would think that the housing crisis was over. While this may help lawmakers get re-elected in a tough 2012 election year, it will barely put a dent into the foreclosure crisis that the U.S. is in the middle of.
I’m not a pessimist. I’m a realist. We have serious housing problems in this country. In my opinion, the time to solve them was during the two bailouts that took place in 2008 and 2009 under George Bush and Barack Obama. Instead of homeowners getting help that was needed, the banks got the money. What did they do with the huge cash infusion? They didn’t help homeowners. Instead, they bought other banks and became larger institutions. This defeated the entire purpose of the bailout. The smart Wall Street head honchos found yet another way to lean on their fraternity brothers in Washington to sway things in their favor. So when the foreclosure deal was announced last week, I didn’t get too excited. I knew that bankers hate to lose money. And of course, with this deal comes a catch. Here are three reasons why this settlement won’t solve the problem:
1. The Deal Doesn’t Include All Banks: Only five banks are involved with the settlement: Bank of America, Wells Fargo, Citibank, JP Morgan Chase, and Ally Financial (formerly GMAC). While these make up the largest banks, many of the worst offending banks are not named in this settlement, which means that homeowners that have mortgages with lenders outside of this pool are not covered. There are still a ton of homeowners that will need help. What are they supposed to do? Keep a house that isn’t worth what they paid for it while their next door neighbor can work a deal with their lender because they happen to be one of the “big five?” This has huge gaping holes and is a serious problem.
2. Principal Reduction and Refinancing are not covered if it’s a Fannie Mae or Freddie Mac Loan: This single-handedly makes the settlement worthless to most people. About 50% of ALL mortgages are a Freddie or Fannie loan. These people will not be covered under the settlement and they will continue to live in houses that are not worth even close to what they paid for them. Investors are not covered either under the settlement. This means that many will continue to let their rental properties go because there is no incentive for them to keep them.
3. People Who Lost Their Homes Already Will Remain Homeless: Many people lost their homes because of deceptive lending practices. The “big five” banks don’t technically admit fault in this settlement, but they wouldn’t be paying $5 billion each if they didn’t think they did something wrong. Many of the homes that people lost to foreclosure are still vacant and in need of an owner. What will these former owners get as their part of the settlement? A whopping $1,500 to $2,000. That’s it. That’s the banks’ way of saying, “sorry you lost your house, here’s a couple of grand. We’re even now.” It’s absolutely ridiculous.
The worst part about this settlement is that this will probably be the last one for the “big five.” That means this will be as good as it gets in regards to private assistance for troubled homeowners. I’m sure that had to be one of the caveats of the settlement for the banks. There is no question that $25 billion can go a long way. Many homeowners will benefit, as long as they meet the strict conditions from the settlement. This is why the settlement will not solve the problem. There are too many homeowners that don’t qualify for it. They will continue to struggle and foreclosures will continue to rise. And while this legisation may win a few elections this year, the big losers will be again be homeowners.