Comments on the Mortgage Fraud Settlement

by Bill Barclay

Progressive Democrats of America, Chicago Political Economy Group, DSA
February  9,2012

According to press accounts, there will be a deal between the banks and the state AGs over housing/foreclosures, etc.  A bubble in housing prices (driven by finance) got us into the Lesser Depression and it could get us out.  But I don’t think this deal is it.

The banks are going to fork over $25 billion, plus access to refi by 300,000 homeowners now shut out and perhaps some payments to 750,000 people who lost homes to foreclosure.  This may sound like a lot of money – until you remember the scope of the problem.

The Fed issued a study in Jan 2012 that reported:

(a) 12 million households with negative equity (“underwater”), almost 1/4 of total households with mortgages;

(b) total negative equity of these 12 million is about $700 billion;

(c) 8.6 million of these households were current in their mortgage
payments, accounting for $425 billion of the negative equity;

(d) the remaining 3.6 million households are all at least 30 days delinquent in payments and

(e) 1.4 million of them are in foreclosure – that is on top of the 4 million or so that have lost homes to foreclosure over the past 4 years.

Another way to put this in perspective is to remember that, in current dollars, in 1933 Congress authorized the Home Owners Loan Corporation (HOLC) to issue debt amounting to almost $50 billion that was then used to buy mortgages from lenders, in essence becoming their refinancing lender on about 21% of all 1 – 4 family dwelling units that existed in the 1930s.  (The equivalent number of households today would be about 10 million).

All in all, we have along way to go – and failure to solve the housing/foreclosure mess means it will continue to act as a drag on aggregate demand and getting the economy restarted.