Posted by Leonard Steinberg on February 6th, 2012

A deal is about to be agreed upon for the Obama led multibillion-dollar mortgage relief settlement to address foreclosure abuses by large banks between 2007 and 2011. The potential support from California and New York comes in exchange for tightening provisions of the settlement to preserve the right to investigate past misdeeds by banks, and stepping up oversight to ensure that the financial institutions live up to the deal and distribute the money to the hardest-hit homeowners.

The settlement would require banks (not the government, although new fees will probably be levied on all of us to pay for this) to provide billions of dollars in aid to homeowners who have lost their homes to foreclosure or who are still at risk, after years of failed attempts by the White House and other government officials to alter the behavior of the biggest banks.

The banks — led by the five biggest mortgage servicers, Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial — want to settle an investigation into abuses set off in 2010 by evidence that they foreclosed on borrowers with only a cursory examination of the relevant documents, a practice known as robo-signing. Four million homeowners have lost their homes to foreclosure since the beginning of 2007.

The deal would set aside up to $17 billion specifically to pay for principal reductions and other relief for approximately a million borrowers who are behind on their payments but owe more than their houses are currently worth. I think allowing for re-financing at lower rates makes more sense personally.

The deal would also provide checks for about $2,000 to roughly 750,000 who lost homes to foreclosure.

If banks fall short of the multibillion-dollar benchmarks set out for principal reduction and other benefits for homeowners, they will have to pay the difference plus a penalty of up to 40 percent directly to the federal government.

The settlement, if all states participate, will also include $3 billion to lower the rates of mortgage holders who are current. Banks will get more credit for reducing principal owed and helping families keep their homes, and less for short sales or taking losses on loans that were likely to go bad, like those that were severely delinquent.

The big questions I have are:  if the banks acted fraudulently, why just a slap on the wrist? Surely much larger fines or worse, jail-time would be appropriate? Then again, what if a good chunk of these foreclosed homeowners simply got in over their heads and are not taking any responsibility for their actions? What about the vast majority of responsible homeowners and credit worthy propspective home buyers who are not in default and are hurt by perpetuating uncertaintly and the rationing of credit? Cleaning up the housing mess is critical to the full recovery of our economy. Hopefully this is not another example of how the corrupt get away with crimes, or those who gamble escape accountability for their irresponsible actions….maybe its a bit of both?