Last month’s massive foreclosure settlement was initially considered a win for homeowners, but in reality, it’s impact on the still struggling housing market is likely to be small at best.
Some economists think that the amount of money dedicated to mortgage principal reduction in the settlement is too low to substantially aid underwater homeowners, while the settlement itself will set off a glut of foreclosures that banks had been holding onto until a deal was reached.
After grounding to a halt in 2011 due to the “robo-signing” controversy, where banks improperly foreclosed on homeowners, foreclosures are expected to increase this year. Now that a deal has been reached, banks will look to proceed by pushing distressed properties toward foreclosure, foisting more homes onto the market.
The $26 billion settlement was reached by attorney generals from 49 states and the five biggest mortgage lenders – – Bank of America, Wells Fargo, JP Morgan Chase, Citigroup and Ally Financial. In exchange for the money, banks’ exposure to potential lawsuits was limited.
“In the short term, it can worsen things,” said Scott Brown, an analyst with Raymond James. “Now that the settlement is out of the way, there will be an acceleration in foreclosures.”
This comes at a time when the ratio of properties to buyers has returned to pre-crisis levels. January saw the supply on the market fall to 5.6 months, matching the supply from March 2005.
Prices are trending downward. Home prices declined by 4 percent year over year in the last month of 2011, according to the S&P Case-Shiller Home Price Index.
Meanwhile, not all homeowners will be helped in the settlement.
The deal only affects mortgages owned by the participating banks – – or less than 40 percent of all mortgages. Homeowners with federally owned mortgages, such as Fannie Mae or Freddie Mac, are left out. In total, only one out of every 11 underwater homeowners will see relief.
Most of the settlement, around $17 billion, is dedicated to mortgage debt relief, like principal reduction, while $3 billion is going toward refinancing interest rates. Only about 20 percent, or 750,000 of 3.5 million homeowners who were foreclosed upon from 2008 to 2011, are eligible to receive between $1,500 and $2,000.
“I don’t think it’s an economic event,” said Guy Lebas, an economist with Janney’s. “I think it is a legal event.”
Part of the reason that the settlement is unlikely to affect home prices, other than the relatively small number of eligible participants, is that homeowners will have to wait to get their money. Banks have up to nine months to figure out who is eligible to receive payments. After the banks have determined who should get what, they still have three years to handout funds.
Still, housing industry officials hope the mere fact a settlement has been agreed to will give peace-of-mind to banks that have been reluctant to lend and refinance.
“It is our hope that in combination with other measures, this settlement will help banks get back into the business of lending,” said Walter Molony, a spokesman for the National Association of Realtors.
Abbey Mintz, a mortgage broker with Certified Mortgage in New York City, agrees. She has found it difficult in recent years to get loans for potential homebuyers who would have qualified before the housing bubble.
“The challenge is that the banks are difficult to close with, right now,” Mintz said. “They’ve increased their standards, which makes it harder to get loans. But I think they’ll eventually loosen up.”
Janet Murphy, who works with the Center for New York City Neighborhoods – – a non-profit organization home-counseling organization created in the wake of the housing crisis, is looking for the settlement to give some underwater homeowners a lifejacket.
“Hopefully, it will bring the stabilization of home prices which will allow more homeowners to accrue equity and cure the larger problem of underwater borrowers,” she said. “Certainly principal forgiveness would hasten the overall process of moving toward stability.”
Currently, more than one in five homeowners are underwater – – meaning their mortgage is worth more than their house.
Still, the road back to stability and rising home prices is long. And while this deal will benefit a few homeowners who were improperly foreclosed upon, it is chances to fundamentally change the overall housing sector.
“What this does do is to correct wrongs – there have been illegal foreclosures,” Lebas said. “What this doesn’t do is increase demand. Prices are not going up because of this deal.”