Bank Settlement Could Spur More Foreclosures

The multi-billion dollar bank mortgage settlement could have some unanticipated consequences for borrowers in trouble. There will likely be an initial surge of foreclosures. Banks, freed from uncertainty over the investigation, will probably pick up the pace of home seizures. But the foreclosure rate will probably fall over the longer term as banks ease the burden on borrowers through principal reductions.

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News of the foreclosure settlement spread in Washington, just as the Senate Banking Committee was holding a hearing on the housing market.

NPR's Chris Arnold reports.

CHRIS ARNOLD, BYLINE: Details were still emerging as the hearing began. And senators wanted to know would this deal do anything meaningful to help homeowners and the housing market.

SENATOR ROBERT MENENDEZ: Do you think the $25 billion state/federal foreclosure settlement is a good deal? Do you think that that's the right amount?

ARNOLD: Senator Robert Menendez chairs the Senate Subcommittee on Housing.

MENENDEZ: There's a lot of angst out there in the country that says 25 billion fell short of the mark.

DR. MARK ZANDI: Well, I don't know what's appropriate in the context of the misdeeds that were done.

ARNOLD: That's economist Mark Zandi. who testified.

ZANDI: I do think $25 billion is substantive and can make a difference in terms of responding to the housing crisis.

ARNOLD: Zandi's the chief economist of Moody's Analytics. The deal is with Bank of America, Wells Fargo, JP Morgan Chase, Citigroup and Ally Financial. As one part of the settlement, those banks will commit upwards of $17 billion towards foreclosure relief, including something called principal reduction. That is lowering the balance that struggling homeowners owe on their mortgages.

ZANDI: And I think that is meaningful. I think you'll get a half million to a million homeowners that get substantive help here. And that'll make a big difference to help to keep any future house price declines limited.

ARNOLD: In other words, Zandi thinks that will prevent a lot of foreclosures. And that will become even more important now that this settlement has been reached. Because ironically, this settlement - at least in the short term - will result in many more foreclosures.

During the AG's investigation, banks had been sitting on lots of homes that were in default because basically they were afraid to move ahead with foreclosure, with this lawsuit hanging over their heads. And so, there's a big backlog right now. But now that bottleneck has been uncorked.

CHRIS MAYER: We're going to have a lot of stuff coming on the market.

ARNOLD: Chris Mayer is a dean and housing economist at Columbia University's business school. He testified at the hearing as well. And he says that we could see a flood of two million foreclosed homes hit the market in the shorter term, others say six million foreclosures over five years.

MAYER: Given the current structure of the lending market, we're not going to have the credit or the capacity to absorb this stuff.

ARNOLD: Mark Zandi says these principal reductions are a powerful tool to prevent foreclosures. But Bruce Marks heads up the Neighborhood Assistance Corporation of America, and he says it turns that out despite all the fanfare about this big settlement...

BRUCE MARKS: Over 80 percent of the home-owners in this country are excluded from the most favorable part of this settlement, the principal reduction.

ARNOLD: That's because the settlement only affects bank-owned loans. That's about 10 percent of all mortgages and some other investor owned loans. Meanwhile, the government controls the majority of home loans right now, in part, through Fannie Mae and Freddie Mac. They're beyond the reach of the AG's. And so far, Fannie and Freddie have resisted principal reductions to prevent foreclosures.

Chris Arnold, NPR News.

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