After negotiating for several months, chronicled throughout on the Fordham Corporate Law Forum, 49 states and five banks have signed onto a reported $25 billion settlement. Although terms of the settlement are still being released, it is clear that five banks – Wells Fargo, Bank of America, JPMorgan Chase, Citigroup and Ally Financial – will be released from certain claims pertaining to loan servicing and origination. Details of the settlement can be reached at NationalMortgageSettlement.com, a website set up after the deal was announced last Thursday.
What will be interesting to monitor is just how encompassing the release from future litigation is. According to the San Francisco Gate, California State Attorney General Kamala Harris and state attorneys general in New York and elsewhere succeeded in limiting the banks’ traditional immunity from further legal action in such cases. Harris, a Democrat and the first female attorney general of California, is famously known for walking out of the negotiations last September, much to the dismay of President Obama who had been hoping for a multi-billion dollar settlement with the banks. Harris had reason to walk away (other than future political gain, as it is rumored Harris may one day run for Governor of California); California, the state she was representing in the negotiations is home to seven of the top ten cities hardest hit by foreclosure, and has an estimated 2.2 million homeowners underwater. She made clear in the Fall that she wanted a better offer from the banks, or she would not sign.
The offer subsequently rose, but now that there has been an agreement, many have wondered: is it enough? CreditSlips.org described the settlement as “all sizzle, no steak.” The settlement apparently will protect banks from “robosigning and overbilling in foreclosures,” and another round of talks pertaining to other claims could start soon. Regardless, five banks with a combined market cap of over $500 billion wound up contributing just $5 billion in real cash, and admitted to no wrongdoing. Decide for yourself if this settlement is really going to move the needle.
Perhaps the better question to ask regarding Attorney General Harris is: “was the hold-out worth it?” Allegedly, talks started with California receiving $2 to $4 billion, with the right to pursue litigation against the banks off the table. In the current deal, California walked away with $12 billion, plus an estimated $6 billion more when banks recognize the diminished value of homes when refinancing. For California, it appears Harris’ posturing was indeed a strong move.
With the grandstanding and negotiation posturing behind us, one must ask: will this settlement actually help the still-struggling national real estate market? Many think not. Last Friday, one day after the settlement was announced, Federal Reserve Chairman Ben Bernanke gave a speech (the full text of which can be read here) to the National Association of Homebuilders in Orlando, Florida, where he said that the government “need[s] to continue to develop and implement policies that will help the housing sector get back on its feet.” Bernanke recommended putting foreclosed homes that could not be sold and are now creditor-owned on the market as rental units. In addition, Bernanke mentioned that tight mortgage-lending standards are hampering home sales.
Ultimately, the much-hyped settlement comes at a good time for the politicians involved. They can “talk tough” on the campaign trail about forcing the banks to pay up. In the bigger picture, however, government still needs to implement meaningful policy decisions to get the real estate market moving in the right direction.