It’s hard to imagine a less-deserving group of victims: people who gambled during the housing bubble by purchasing homes with borrowed money that they knew or should have known they couldn’t afford, but who are now able to stay in the homes they should have never bought because of what amounts to paperwork errors on the part of the nation’s big banks.
But that’s essentially what went down yesterday, thanks to the Obama administration’s latest re-election gimmick — the nationwide mortgage-foreclosure settlement.
Everyone — from the president, to officials at the Department of Housing and Urban Development, to at least some of 49 state attorneys general who cobbled together the pact, including New York’s Eric Schneiderman — took the all-too-familiar class-warfare route in selling the deal to the public and national media. They’d like us to believe that the nation’s largest banks are finally paying for their bad behavior during the housing bubble and its aftermath, when millions of Americans either lost or were in jeopardy of losing their homes.
That’s because the banks will cough up $26 billion for various abuses, including illegal foreclosures. Many “victimized” home-owners will get relief, mostly in the form of refinancing of underwater mortgages. So, they can stay in their homes, at least for a while.
It’s such a win-win, the administration is boasting, that even those people not part of the specific victimized class will benefit because the deal creates a stronger housing market. If banks can’t foreclose on properties, the theory goes, they can’t depress housing prices more by selling these properties on the cheap.
Problem is, almost all of the “logic” behind the deal isn’t logic, but a combination of half truths and outright lies. Even worse, the settlement will likely prolong the housing slump and set the stage for it to happen again.
Take the “victims,” who faced eviction from their homes because of the banks’ supposedly corrupt foreclosure practices. These home-owners didn’t really own their homes; many, in fact, barely plunked down a downpayment for a mortgage.
By borrowing far more heavily than what they could afford, they were also gambling that housing would keep rising in value, defying basic rules of economics.
Now they’re being rewarded for their mistakes. Ironically, even the government officials who were part of the deal have privately conceded that, with few exceptions, more than 95 percent of the so-called victims weren’t victims at all; they faced imminent foreclosure because they were delinquent on their mortgage payments — often for a year or more.
Or as banking analyst Dick Bove put it: “What this settlement did was to help 1 million people who were deadbeats.”
Why are these deadbeats getting bailouts? Aside from election-year politics, at issue is the foreclosure practice known as “robo signing” — a procedure in which low-level bank employees, without direct authorization, approve perfectly legal foreclosures on a bank’s behalf.
The foreclosures themselves were legal; the only apparent illegality is that the banks streamlined the foreclosure process, with clerks signing the bank officer’s name on legal documents.
But the worse part of the deal is that it will prevent the housing market from recovering anytime soon while sowing the seeds for another bubble. Much of the $26 billion will be used to refinance underwater mortgages, in which borrowers are either being forced out of their homes or face possible eviction because they owe more than their homes are worth.
All of which sounds harmless — until you realize that foreclosures are a necessary ingredient to the housing market’s recovery, because they allow prices to hit bottom and entice people who can afford homes to buy them and bid up prices again.
So, the bailout does little more than delay the pain because housing prices at some point must reflect the market, with its glut of inventory in many areas.
We’re also teaching a generation of home-owners that there are no risks to their decisions because the government will bail them out. If there are no consequences to risk, why not just roll the dice again and again?
It’s tempting to see the mortgage settlement in the broader context of the bailout mania that has swept the country since the 2008 financial crisis. The auto companies and the big banks got bailouts, so why shouldn’t homeowners?
But when will it end? Probably when it isn’t an election year.
Charles Gasparino is a Fox Business Network senior correspondent.