In Praise of the Mortgage Settlement

The best thing about the $26 billion mortgage settlement announced Thursday may be that it represents a case study in extremes. Basically, just about everyone supports it, but nobody really likes it—and again, that’s the best thing about it.

Consider the support: Along with the federal government, no less than 49 state attorneys general (Oklahoma’s AG is the only holdout) have signed on to the agreement. The Mortgage Bankers Association, which represents lenders, and the Center for Responsible Lending, which serves as an advocate for borrowers, are both on board. The five institutions involved—Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and Ally Financial—are also, by no coincidence, the biggest in the business, which means the deal will have significant ramifications throughout the industry, and particularly in pending negotiations with other banks. The $26 billion figure is surely some kind of record, and the sheer demographics are unquestionably broad—AGs from states like Iowa helped lead the negotiations, while the banking commissioner of North Carolina will manage enforcement, even as states like California put their own people forward to help drive the provisions outlined in the deal.

And yet. . .virtually no one seems to be a huge advocate of the settlement. Some say the figure is too high, others that it’s laughably low—one group is on record as saying that anything shy of $300 billion doesn’t count. Critics on the right see it as another case of federal overreach and bailouts to the undeserving, while many of the left believe it doesn’t go nearly far enough in helping homeowners who are underwater on a mortgage, or punishing the institutions that were so irresponsible.

And of course, the actual lending practices that form the core of the settlement seem particularly open to interpretation. Depending on who you listen to, the deal either introduces new regulations that threaten free market practices, or offer up the same rules that have long been in place, and long been ignored.

Here’s a slightly different way of looking at it. There are currently some 11 million underwater homeowners, and maybe 3.5 million more getting there. Their reasons for being is this predicament are all over the map. The idea that any single deal could cover every contingency, or help every individual, or take to task every financial institution guilty of wrongdoing, is ludicrous.

The fact that this settlement is backed by just about everyone and yet liked by almost no one means that it’s exactly the right first step. That’s a good thing. This settlement does nothing to prevent other deals; in fact, it’s a safe bet that there will be more investigations, more settlements, even some high-profile criminal cases. But it is absolutely vital for everyone—the mortgage industry as whole, specific institutions, federal and state prosecutors, individual homeowners—to start getting out of this mortgage mess.

The settlement serves exactly that purpose—it begins a painful but necessary journey. It’s even possible that with the settlement in place, other institutions will start making deals of their own, perhaps with borrowers, involving a reduction in principal. If that happens, everybody wins.

Written by Staff