At the time, it looked like a sweet deal for the banks. The fines were paltry compared with the damage done to homeowners and the economy. And much of the relief the banks were obliged to provide could be met by continuing more or less with business as usual.
It still looks like a sweet deal.
The Office of Mortgage Settlement Oversight, the monitor of the settlement, released a preliminary report last week showing that 138,000 homeowners had received some form of relief from March 1 through June 30. That is roughly the number that would have been expected under various aid programs in effect before the settlement. Worse, with some three million borrowers now in or near foreclosure, according to Moody’s Analytics, it is nowhere near the level of relief needed to fix the housing market.
The type of relief provided — mostly short sales, in which a bank allows a homeowner to sell for less than is owed on the mortgage — had become increasingly common before the settlement.
Short sales are better than foreclosures, in part because they prevent vacancies that depress house values. But they are not punishment for wrongdoing in any meaningful sense; rather, they allow banks to get higher prices for underwater properties than they could have gotten in foreclosure sales.
Nor do they fulfill the settlement’s main purpose: to keep underwater borrowers in their homes by reducing the principal on their mortgage loans. According to the monitor’s report, $8.7 billion of debt has been written off in short sales versus only $750 million of principal reduction from loan modifications.
The settlement was not, of course, intended as a cure for the housing bust. And future progress reports will no doubt show many more homeowners receiving big loan modifications. But, based on the banks’ performance so far, it also seems likely they will be able to structure the required relief in ways designed to tidy up their balance sheets, rather than to save as many homes as possible.
Even the relief that is provided may turn out to be less than meets the eye. That’s because much of the debt forgiven in short sales and loan modifications will be counted as taxable income to the borrowers, creating huge tax bills they will not be able to pay.
Mortgage debt that is forgiven is exempt from taxation under current law, but only if the debt was used to buy or improve the house. The law does not exempt debt forgiven on many home equity loans, even though the foreclosure settlement envisions billions of dollars in modifications to such loans.
Several bills in Congress call for extending the law, which is set to expire at the end of the year. But what is obviously needed is a broader law shielding all forgiven mortgage debt from tax.
Meanwhile, an investigation into the mortgage abuses that led to the financial crisis, promised by President Obama in January, has been slow to produce results. The settlement left open the possibility of civil and criminal suits on mortgage securitizations and other practices that inflated the bubble. The aim is to produce deeper accountability and larger fines with which to provide even more mortgage relief, but no suits have yet been filed.
The economy will not recover and justice will not be done unless and until the mortgage mess is resolved.