Housing and Urban Development Secretary Shaun Donovan says Thursday's big mortgage settlement with several banks "doesn't solve everything."
Well, no. Trillions of dollars in household wealth was lost in the housing bubble. The amount of the settlement: about $26 billion.
Still, by any measure it represents a meaningful step forward in reducing the debt bomb hanging over the nation's housing market. It is much more significant than the complex mortgage-modification programs the Obama administration has tried over the last three years. Thursday's agreement must be approved by a judge to be put in effect.
The deal settles "robo-signing" claims faced by mortgage servicers, which were accused of processing documents with forged signatures or signing papers that hadn’t been read.
Under the deal, five big banks agreed to reduce loan principal by up to $20,000 for as many as 1 million households at risk of default. They also agreed to refinance up to $3 billion in loans for people who are underwater on their mortgages. About 750,000 borrowers who have lost their homes to foreclosures affected by robo-signing would receive $2,000 cash payments, and $3.5 billion was set aside for states participating in the settlement. Only Oklahoma has not signed on.
In an appearance Thursday in Kansas City, Missouri Attorney General Chris Koster said the state’s share would be more than $196 million. It would be divided among the deal’s several facets: principal reduction, refinancing, cash payments to people whose loans were foreclosed and a direct payment to state government.
Gov. Jay Nixon has proposed that $41 million in the last category go to ease a budget cut aimed at the state’s colleges and universities, which seems like a reasonable move given the state's priorities.
Kansas would receive about $50 million, with $14 million earmarked for state government and the rest aimed at helping homeowners.
The national agreement included requirements that will effectively force a welcome upgrade in bank practices.
They include improved standards for executing foreclosure documents and consumer disclosures, as well as an end to double-dealing by banks that proceed with foreclosures at the same time they’re negotiating mortgage modifications.
Another key point of the new deal: Banks that are working with borrowers seeking to refinance or avoid foreclosure must set up a single contact. In other words, no more runaround.
Nor is this the end of the effort by state attorneys general. Koster said the states would now move into a second phase — seeking a similar settlement from smaller mortgage lenders.
Some have criticized the agreement as unsatisfactory, saying $2,000 isn't much compared to the trauma of foreclosure.
Maybe not, but there's little or no evidence anyone was wrongly foreclosed upon. Some of those receiving money may well have been irresponsible about the amount of debt they took on.
Others have criticized the $20,000 in principal reduction as inadequate, given that the average gap for underwater mortgages is $50,000.
Even so, the amount is significant, and it may encourage many borrowers around the nation who are on the cusp of mailing in their keys to instead pay off the loan.
The settlement may be short of a grand solution, but it's a welcome development for a market where encouraging news has been scarce for too long.
Copyright Kansas City Star. Reprinted with permission.