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Healing the Housing Market: How Does the Settlement between the States’ A.G.s and the Five Largest Mortgage Servicers Affect You?

Our housing market has been sick for years and it is in dire need of healing.  Last week it was announced that a settlement was reached between the states’ (49 of them anyway) Attorneys General and the five largest mortgage servicers to the tune of about $25 billion.  On the surface, this settlement will help a lot of people in some way, shape or form, but there are a lot of detractors as well.  Is this the cure that our economy needs to heal our housing market?  Let’s take a closer look at the settlement between the states’ A.G.s and the five largest mortgages servicers and how it affects you.

First, let me identify the five servicers who are a part of the settlement:  Bank of America, Wells Fargo, JP Morgan Chase, CitiBank, and Ally Financial.  Second, the beneficiaries are anyone who’s loan is owned by any of these banks or who had a mortgage owned by one of these banks and was foreclosed on between 2008 and 2011.

People who can expect to receive a benefit from this settlement or those who are underwater on their mortgage and behind on their payments (even at eminent risk of default).  I think it’s appropriate to wonder when those who are to receive benefits might actually get them.  Under the terms of the settlement, the banks must fulfill their obligations within three years and they have to satisfy 75% of them by the end of the 2nd year.  There are incentives for them to act within 12 months and there are penalties if they are late.

Money has been allocated for a number of different things including loan modifications with principal reduction, cash payments to those who were foreclosed on, refinances for those who aren’t behind on their mortgage but are underwater.  There are a number of other areas including repayment of public funds lost due to the circumvention of protocol as well as money for homeowners who have lost their jobs.  The amount of principal reduction a borrower gets is dependent on their specific situation but the national average that a homeowner is underwater is $50,000 – obviously it is greater in places like Southern Nevada who has the unfortunate title of leading the nation in foreclosures.

Considering that estimates put the figure at $700 billion as far as how much more borrowers owe than what their homes are worth, the settlement won’t even scratch the surface as far as healing the housing market.  Shaun Donovan, Secretary of the Department of Housing and Urban Development estimates that about 1 million people could receive principal reductions because of this settlement but based on the money that has been allocated for this purpose, that would only amount to $10,000 per person, far less than the average of $50,000 mentioned above.  Those whose homes were foreclosed on can expect to receive an estimated $1,500 – $2,000.  This isn’t enough for a down payment on a new house and may pay the rent for a month.  So how do we heal our housing market?

The thought of just letting the market run its course has been met with much resistance but in the end, it may be the fastest way to recovery.  Consider that those who have postponed re-establishing credit while they are living rent-free in a home they “own” while waiting for it to be foreclosed on will have to wait a minimum of three years from the foreclosure sale date before they can qualify to buy a new home.  Additionally, while they are living in that home, it is one less home that is available to buy for someone who can afford it at current market prices.  Additionally, the home is likely in deteriorating condition since the owners probably don’t want to put money into an asset they know they are going to lose in the (near) future.  While I feel very bad for all of us who are struggling in a very weak economy and have lost homes via short sale or foreclosure, I can’t help but look at the people who went through this in 2008 and 2009 and are now able to qualify to buy a home and think that we could work through this problem so much faster if we just let the process work instead of throwing up roadblocks at every turn.  The fact of the matter is that if a homeowner with a mortgage isn’t making their payments, the mortgage company who is supposed to receive the payments should foreclose on that home.  This may sound harsh but I truly believe that we would all be better off if we bit the bullet and made the tough decisions instead of hoping the government will placate us in some way.

Many athletes try to play through minor injuries and they often perform at subpar levels and in many cases they exacerbate the injury to a point where they finally have to sit out anyway so that they can properly heal.  To make matters worse, the recovery time at this point is often longer (sometimes substantially so) than it would have been if they just sat out when they got injured the first time.  Athletes that have experienced this in the last year of their contract may end up signing a smaller contract than they otherwise would have if they had recovered more quickly and been able to perform at a higher level.  I believe this is what we are doing with our housing market – we are asking it to play injured and it isn’t recovering.  We need to put it on the injured-reserve list and let it recover the way it needs to so that it can come back strong.  Your comments and thoughts are welcome.  Please “Like” it, share it, and comment on it.  Thanks for reading.