A Rounding Error For Banks

Source: Decline of the Empire

Perhaps you heard the news yesterday that the Department of Justice and the attorneys general of 50 49 states have settled with the Big Banks over foreclosure fraud. Amidst the great noise that followed the announcement, Henry Blodget and Aaron Task of the Daily Ticker gave us the straight scoop about the 26 billion dollar settlement. Henry called it a “rounding error for banks.” The quote and the video are from $26B Mortgage Settlement: Good for Banks, Not So Good for Homeowners. This is all you really need to know.

The settlement is being hailed as the biggest multi-state settlement since the 1998 tobacco agreement. But as Henry and I note in the accompanying video, the settlement is too small to really help the housing market, or even do much for individual victims of fraud and abuse.

The deal may, in fact, hurt housing by sending a message to people who’ve stayed current on their mortgages that irresponsible behavior is what gets rewarded in America. That, presumably, is not the intention of policymakers but the “moral hazard” fallout from the settlement. More Americans may “walk away” from uneconomic loans, which will put additional pressure on local housing markets.

Furthermore, several experts note that for all the rhetoric about punishing corporate crimes and helping victims of abuse, the banks have once again gotten away with a slap on the wrist and may end up benefiting most of all from the settlement…

Now, $26 billion is a lot of money but it’s a drop in the bucket compared with the trillions of dollars of household wealth that’s been lost since the bursting of the credit bubble in 2008. Furthermore, $2,000 is a small price to pay to homeowners who lost their homes in illegal foreclosures. The $20,000 mortgage modification is great, except the average deficit for underwater mortgages in America is $50,000.

In addition, the $20 billion isn’t coming out of the banks’ pockets; it’s coming from investors and, ultimately, taxpayers.

“The mortgage principal write-downs are guaranteed to come almost entirely from securitized loans, which means from investors, which in turn means taxpayers via Fannie and Freddie, pension funds, insurers, and 401(k)s,” writes Yves Smith at Naked Capitalism. “That $20 billion actually makes bank second liens sounder, so this deal is a stealth bailout that strengthens bank balance sheets at the expense of the broader public.”

America is too far gone to take meaningful action against bank fraud. The banks are too powerful. We didn’t need another timely reminder of their political supremacy. One would hope that we’ve already learned that lesson.

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