How Will the Mortgage Loan Settlement Affect the Housing Market?

It’s completed, at least for now: on Thursday a $25 billion government settlement was reached with the five large banks who have been accused of abusive mortgage practices over the last few years. Several large groups of injured parties will receive some money, with parties in California getting the largest portion, but none will get huge amounts. The settlement will be spread out over three years, and additional claims and litigation for some practices were not ruled out.

The banks are Bank of America (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo & Co. (NYSE:WFC), Citigroup Inc (NYSE:C)., and Ally Financial Inc., with Bank of America paying almost half of the total settlement. They are released from further civil government claims over faulty foreclosures and mishandling loan modification requests, but they and other banks are not protected from claims arising from wrongdoing involving packaging loans into securities. The latter is a prime target for investigation, as named by the White House and the Justice Department.

Specific groups receiving compensation include: $2,000 each for 750,000 borrowers who lost their homes to foreclosure; $3 billion for borrowers who are current in their payments, but whose homes are ‘underwater’; and $17 billion in principal reduction and loan modifications for borrowers who are delinquent and in danger of foreclosure. In a nod towards homeowners whose loans have been bundled and sold, the deal provides stricter oversight of foreclosures and one point-of-contact for borrowers.

Values of properties have declined 33 percent since a peak in 2006, and nearly 11 million American homes would sell now for less than their mortgages. What homeowners need is a bottom to shrinking prices, so that potential buyers will stop waiting to purchase properties, and act. This settlement’s impact on the problem can be seen as encouraging; so far as it prevents or lessens the rate of foreclosures (distressed sales), it should help to keep inventories from being overwhelmed by the supply of much cheaper properties. Also, the new rules that constrain lender abuses might encourage new buyers, which would boost the sales side of the market.

However, as news of the settlement and the problems that caused it is made more public, many buyers might well become more wary of signing the documents necessary for buying, and some of those may decide that renting is safer, after all. To those potential buyers, price will matter more, as it would be one additional – quite large – factor of concern. To the extent that buyers trust the government to keep the mortgage loan playing field level, the settlement should go some distance to help the housing market, but these buyers will be watching what comes next.

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