Will States Cut This Faustian Bargain with Banks?

States and large banks (NYSE:KBE) are nearing a deal to help both sides battle the declining housing market. In the proposed deal that could cost $25 billion, banks would benefit from greater protection from state civil lawsuits in exchange for refinancing loans on homes where the owner owes more than the home is worth. Banks have been holding out on the deal for more legal protection that state attorneys were originally willing to provide.

“‘While I can’t discuss the details of our negotiations, I will say that we are negotiating a limited — not a broad — civil liability release. We are discussing additional ways to help homeowners while still holding the banks accountable,’ said a spokesman for Iowa Attorney General Tom Miller to Reuters. Treasury Secretary Timothy Geithner said he hopes to reveal the plan in coming days.
Advocates of the deal believe the situation is a win-win, where homeowners who were previously not eligible for refinance would be able to seek assistance and legal ‘grey area’ would be cleared up for banks, which has been dragging down their stocks. ‘An estimated 22.5 percent of all residential properties with a mortgage — around 10.9 million of them — are underwater, according to data from CoreLogic,’ per Reuters.

Is this a fair bargain? Looks like a win-win for banks.

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