While President Obama is hailing his $26-billion mortgage servicing settlement as “a landmark settlement” that will “speed relief to homeowners” and “begin to turn the page on an era of recklessness,” in truth, the deal affords only modest relief to homeowners and fails to address systemic flaws that precipitated the 2008 financial meltdown.
Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial handle about 27 million or 55% of outstanding home loans. The $26 billion settlement with these “big five” will be accomplished over three years, and the payout could increase if the next nine servicers sign on.
Of the $26 billion, no more than $6 billion represents direct cash outflow. This includes $1.5 billion for payments around $2,000 to 750,000 borrowers improperly foreclosed upon from 2008 to 2011.
The banks will pay out another $3.5 billion to states, including for legal aid to homeowners. Also, to settle fraud charges against subsidiary Countrywide Financial, Bank of America will pay up to $1 billion to the Federal Housing Administration.
For the rest, the banks are to commit $17 billion to principal reduction and other loan modification for underwater borrowers behind on mortgage payments, with an average reduction of $20,000. Another $3 billion will go toward refinancing for those current on payments.
Nevertheless, with 4 million homes lost since the beginning of 2007, 3.4 million facing foreclosure and 12 million mortgagors under water, the settlement will at best accord relief to 2 million borrowers. What’s more, while $26 billion in damages may seem huge, it pales against $700 billion authorized under the Toxic Assets Review Program (TARP), $700 billion of aggregate borrower negative equity and $7.77 trillion in newly uncovered bailouts by the Federal Reserve (netting banks $13 billion in profits).
Moreover, the settlement releases the banks from civil liability to states for “robo-signing” (producing false and forged mortgage instruments) and other claims. While not realizing their full goal of discharge from criminal liability and private lawsuits as well, the banks may well get far more than they give.
Also disappointing is how this settlement does not address underlying causes or prevent future abuses by financial giants deemed “too big to fail.”
One suggested remedy is to revive provisions of the Glass-Steagall Banking Act of 1933. Glass-Steagall followed the 1929 stock-market crash and ensuing failure of nearly 5,000 banks. Among other things, it required separation of commercial banking from investment banking. Unfortunately, this restriction was repealed in 1999.
The “Volker Rule,” banning proprietary trading using depositor funds, was supposedly a substitute. But not scheduled to come into force until next July, it has already morphed into a 298-page nightmare regulatory proposal riddled with loopholes, uncertainties and gibberish.
A similar fate threatens its parent, the Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank has only been minimally implemented and is under enforced. Wall Street forces are fielding legions of lobbyists to demolish it, while big banks and their executives are hedging by bankrolling both major political parties.
Resurrecting Glass-Steagall is scarcely a radical notion. In 2009, Sen. Maria Cantwell (D-Wash.) introduced such a bill, with co-sponsors as diverse as John McCain (R-Ariz.) and Bernie Sanders (I-Vt.). Rep. Ron Paul (R-Texas) voted against the 1999 repeal. Even former Speaker Newt Gingrich has conceded that “in retrospect, repealing the Glass-Steagall Act was probably a mistake” and “[w]e should probably re-establish dividing up the big banks into a banking function and an investment function and separating them out again.”
More far-reaching reform may be warranted. Some experts recommend breaking up and limiting the size of mega-financial institutions. This country has antitrust laws to preserve competition and protect consumers, and yet we condone financial behemoths powerful enough to wreak havoc on the economy and extract ransom from taxpayers. To quote former Federal Reserve Chairman Alan Greenspan, “… if they’re too big to fail, they’re too big …”
Jan Schneider holds a law degree and a doctorate in political science. A former Democratic candidate for the District 13 congressional seat, she practices law and lives on Bird Key.