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The Multistate Settlement Lottery: Bupkis

posted by Adam Levitin

The NY Times had some details today about the multi-state attorney general mortgage servicing settlement in the works. It looks every bit as awful as one might have feared. Here's the criticial take-away:  this is bupkis. It gives meaningless relief to a meaningless number of randomly or adversely selected homeowners.  It doesn't do justice, even by halves. 

First, though, there's a detail reported in Gretchen Morgenson's otherwise insightful piece that I have on good source is incorrect.  The piece states that the banks would be doing principal write-downs on loans they own or service.  That's gotta be incorrect.  The banks can do principal write-downs only on loans that they own.  They have no legal authority to pledge write-downs on loans that they service on behalf of investors.  (Remember the Greenwich Financial suit against Countrywide for doing just that?)  

There's a critical implication here, then about the scope of the multi-state settlement:  at best 20% of the population of underwater mortgagees will be helped by this settlement, say 2.2 million homeowners.  The other 8.8 million (and probably 10 million by my reckoning) are SOL.  How do you think they're going to feel about their AGs?  About their President?  Too many times have American homeowners been promised help without receiving any.  It's getting old. 

That 20% isn't the 20% who are deserving in any particular way.  They are just the 20% who were lucky enough that their loans weren't securitized for whatever reason.  And it's a 20% that likely includes lots of jumbo loans--people who borrowed more--while those who borrowed less won't get help. Countrywide kept lots of payment-option ARMs on its books.  Are those the homeowners who are the most deserving?  

It's doubtful, however, that it's even 20% because that 20% figure includes lots of loans on the books of small banks that aren't part of the settlement.  It also includes a large number of 2d liens. My best estimate is that less than 10% of mortgagees are actually eligible to be helped by the settlement.  Congratulations on winning the lottery!  There's justice for you. 

Let's pretend, for a moment, that all $25 billion in the settlement would go to principal reductions. How much does this buy?  Very little.  Remember that there's $700B in negative equity in the US spread out over 11 million homeowners.  So at best this comes out to $2,272 in principal reduction relief per homeowner.  Compare that with the average $65,000 in negative equity per homeowner and this is just bupkis.  And that's not even considering the states with deeper negative equity on average:  California, Nevada, Florida, Arizona, etc.  In California negative equity averages $93,000. $2,722 eats away less than 3% of that.   

OK, you say, maybe this help is concentrated on 10% of the mortgagees, as you say.  In that case it's $27,222 a head.  That's something, isn't it?  Well, consider a homeowner with a $135,000 home with a $200,000 mortgage on it.  Even if that homeowner gets $27,222 in principal reduction, she still owes $172,778 on the home.  That means LTV has gone from 148% to 128%.  An improvement, no doubt, but not at all a meaningful one.  The homeowner remains deeply underwater.  Unless the principal reduction puts the homeowner in positive or near positive equity (say 105% LTV max), it ain't gonna matter.  It's just an accounting gimmick.  So even in the best case scenario, the relief contemplated by the multi-state settlement is meaningless help to a meaningless number of random or even adversely selected people. Is this really the best that the AGs in the multi-state deal could do?  

There's something really important to note here:  the banks have shown that they are willing to settle on a way that includes principal reductions.  That shouldn't be a surprise--they've done that before, such as the mini-settlements that Massachusetts has done with Goldman and Morgan Stanley or that New York's Banking Superintendent did with Goldman. So if this is a matter of dollars, not principles, why on earth are the AGs in the multi-state settlement going to cut a deal for $25B? This is pocket change for the defendants and doesn't come anywhere close to rectifying the harm they wreaked on the economy, preventing future foreclosures, or pushing a measure of accountability for the financial crisis.  

Final point about this travesty:  it has implications about the 2012 Presidential election.  Remember that it's not just a bunch of AGs at the table here.  It's also the Obama Administration.  And therein lies the problem.  Up to this point the Romney and Geithner foreclosure plans have been identical. Romney's plan is to clear the market by foreclosing on everyone fast as possible, while the Geithner plan is to get out of the way (or look the other way) while the banks do their thing.  On housing policy, I really can't distinguish Romney and Geithner in any meaningful way on substance. This plan doesn't do anything to change that.


I asked to do a guest article. However, I'll share what would have been in my article here. Banks require any debtor to first default before they can restructure their debt.

It's a bit audacious to keep calling others defaulters when it was the banks that have greased the road so many would crash.

Debt restructuring should not first require a default, until that becomes the law, all of these proposals will not work because they go on the premise that those requesting help must first be declared in default.

Good points, but think of this as yet another trial balloon, not an actual Settlement.

If this were an actual Settlement between State AGs, the DoJ, and the U.S. Treasury, and the Banks, it would be Prima Facie evidence of Public Corruption due to the Penalties being so disproportionate to the harm caused to the Public.

Of Course, if the penalties were proportionate, the banks would be completely wiped out, and multiple hundreds of thousands of bank employees would lose their jobs never mind the aftershocks.

Patrick, I haven't seen anything to suggest there is not public corruption in our midst.

This is an aside but:
When you have two or more entities vying for resources there are only two primary modes of interaction: Competition or cooperation, and two derivative modes, namely competing under the guise of cooperating or cooperating under the guise of competing; you can refer to either as cheating.

When you have many groups and many people in many different sub-sets of co-operative groups trying to use many different types of resources, cheating is inevitable and unavoidable. A small amount of cheating has to be tolerated. What is intolerable is when the cheating is greater than social cooperation. In the latter case, there is no symbiotism, just parasitism and only one logical response: get the parasite under control.

Banks that aren't growing the economy in spite of Federal Reserve infusion, in my mind count as parasites (given free money from the federal reserve, a socially-useful bank should be trying to come up with pre-packaged business plans and chasing people down with any relevant skills and a pulse to have them start a business with a bank loan).

Political parties that do their utmost to block a return to full employment are parasites.

Regulatory agencies that do little to no enforcement are parasites.

Reject all settlements ... and point the OWS crowds towards the Obama Administration for refusing to investigate, prosecute, and imprison their Wall Street friends.

Get money out of politics, get big banks and big corporations out of bed with political leaders - that's a start. That's how we came to this mess in the first place. There won't be any invetigations or prosecutions until the campaign contributions from big banks, big energy and anyone else who has enough money to purchase influence and policy are stopped.

Elaine, that sounds like something that Buddy Roemer would say.... ;)

Elaine, thanks to our glorious SCOTUS, that would require some heavy amending of the Constitution.

Cardiff Garcia, over at the Financial Times alphaville blog, takes a more technical look at the 'balance sheet recession,' and provides a good deal of evidence supporting your view (Adam) that the decline in home equity is probably the most significant factor affecting homeowner spending.


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