The Bank Settlement Solved Little

Although one would think the payment of $25 billion as a fine would resolve outstanding claims and issues, it did little to really help the lenders. There are a substantial number of remaining claims and issues that will seriously inhibit mortgage lending and which will cost the banks and the economy for several more years. This settlement was just a politicians dream come true which allows them to go forth in the election and claim they won one for the “hard working people of America” against the big bad banks. Elizabeth Warren was the instigator of this damage, and Obama was the implementer. What is not publicly stated is that bond holders will lose as well, since part of the settlement requires the write down of principal. If a bank servicer does do a principal reduction, then the bank gets the credit, but the bond holder gets the financial hit. That will clearly not be beneficial to selling securitized home mortgages in the future, which means less liquidity in the mortgage market. A bad outcome for the consumer, and a bad outcome for the housing recovery and the economy.

Every servicer and lender will now have a government monitor. That person will have examination and enforcement powers. They will be able to decide they don’t like something and levy new fines. Translate this into excess compliance costs for servicers and extra procedures to approve a loan and service the loan. That cost has to get passed onto the consumer in fees or other costs. It also means a less robust response time to get mortgages approved and closed.