The $26 billion settlement that state authorities wrangled out of the nation's five biggest banks amounts to peanuts compared to the damage that was done to homeowners across the country.
The five banks who've agreed to the settlement are Bank of America (who purchased the nation's largest mortgage lender, Countrywide Financial), JP Morgan Chase (who bought Bear Stearns), Wells Fargo (who bought Wachovia), Citigroup (who was a major recipient of federal government bailout money), and Ally Financial (formerly GMAC and now majority owned by the US Treasury).
Are you seeing a pattern here? All of these banks have been the recipient of federal bailout funds and some, like Ally Financial, are still dependent on US taxpayers. Nevertheless, they've stockpiled enough cash that they could pay the $26 billion settlement today and not take a hit to their bottom lines. But that's not what they'll have to do. The settlement terms are much sweeter than that.
Over three years, the banks will help about one million homeowners who owe more than their homes are worth to restructure their mortgages. This is estimated to provide about $20,000 in debt relief per homeowner. Unfortunately, most homeowners in that situation are underwater on their mortgages by an average of $50,000 each, so this provision won't be enough to stop the rise in foreclosures and bankruptcies. Furthermore, the three-year timeline is too long; people are in debt and in financial trouble right now, and in three years a lot of people could lose their homes before they see any debt relief from the big five banks.
The settlement also sets aside funds for people who lost their homes to foreclosure: about 750,000 people will receive between $1,500 to $2,000 in cash. Whoopee. When you've lost your home, a $2,000 check doesn't mean very much, especially when the bank that foreclosed on you has been accused of forging documents and was completely unresponsive to your requests to refinance or negotiate better payment terms. And these banks will be released from prosecution by the states for their criminal activity, which makes the settlement that much more painful for the American people.
The banks say this settlement will help the nation put the mortgage mess behind it, and it will ultimately help the housing market recover. They're wrong. Four million people have lost their homes to foreclosure since 2008. The settlement barely covers less than one-fifth of those households. And most US homeowners won't qualify for debt relief, either. Fannie Mae and Freddie Mac own over half of the mortgages in the US, but they're not a party to the settlement, and neither are people whose mortgages were bundled and sold to private investors as mortgage-backed securities. That mess could take more than a decade to unravel.
In short, the settlement is a very, very good one for the big five banks. It will help them put the mortgage scandal behind them so they can get back to record profits, huge executive pay packages, and business as usual. And because the penalty was so small, the banks won't be cleaning up their act any time soon.
We'll have to wait and see if the federal government, particularly Obama's new mortgage crime-fighting unit, can extract meaningful penalties from these scofflaws. So far, the federal government's record isn't good: over the past 20 years, the SEC has let these banks off the hook time and time again for the same violations, with only minimal financial penalties. And the federal government, unlike the states, has a vested financial interest in seeing these banks succeed, so we can't expect them to be more aggressive in taking these big banks to court.
But somebody needs to do something, and the best move would be for Congress to pass legislation to reinstitute Glass-Steagall or another law that would break up the big banks into smaller entities. This would reduce their lobbying power in Washington DC, reduce the amount of resources they can bring to bear against state and federal regulators, and make the failure of any one of them less likely to jeopardize the entire financial system. This necessary reregulation is long overdue and, while Congress is paralyzed with partisanship, at least one of the presidential candidates should be taking up this issue. So far, all of them are avoiding the most important campaign issue of all: what to do about the economy.
It's up to the voters--ordinary people like you and me--to force a shift in the political discussion. To ask each candidate, "What will you do to reregulate the banking industry?" and "What is your solution to help homeowners who are underwater on their mortgages?" and "Four million people have lost their homes to foreclosure, and many of them are out of work. What are you going to do about that?"
Keep asking. Shout if you have to.