The nation’s largest banks took their first tentative steps toward settlement as they offered to pay up to $5 billion to settle claims related to allegations of foreclosure fraud. The amount represents a fraction of the potential liabilities for the banks and is far short of the more than $20 billion in penalties alone sought by officials.
The Wall Street Journal offers up the contours of the initial negotiations. While a final deal is far, far away, the key points of discussion are helpful in gauging just how severely these institutions will be punished for their role in the collapse of the housing market.
Government officials have two broad categories they want addressed: Changes in mortgage-servicing practices and allocation of penalties including the reduction of loan balances for certain borrowers, such as those who now owe more on their mortgage than their house is worth through no fault of their own.
Not surprisingly, the banks are pushing back hard and have said they are not willing to negotiate on any write-down of principal balances, arguing it would incentivize people to simply default on their mortgages.
Instead, the banks have essentially offered a $5 billion compensation fund used to compensate any borrowers previously wronged in the foreclosure process and provide transition assistance for borrowers who are ousted from their homes. One idea being floated is that a foreclosed borrower could qualify for several months of free rent once they find new housing. The banks are also seeking a general release of all claims from the government.
Let’s be frank here. There will be a settlement at some point. Neither side wants the expense or the uncertainty of a trial. But to even remotely address the magnitude of the losses caused by the widespread fraud perpetrated by the mortgage banking industry a compensation fund of a few billion dollars and not much else will not do.
photo courtesy of respres via Flickr