Mortgage Settlement: What To Do With the Money?
Eventually, the attorneys general of the states got their settlement from the big banks–at least $25 billion. That’s a lot, of course, but it will be spread out over all involved states and may take forms other than direct cash infusions.
The big question is what to do with the money? Should it go, as housing advocates had assumed, to help struggling homeowners facing foreclosure? Or, should it go, as strapped state officials are maintaining almost unanimously, straight into general fund coffers to make up for some of the terrible cuts about every state has had to make?
What About California?
Taking into account credits designed to encourage the banks to make payments to homeowners, California’s share of the settlement could climb to as high as $18 billion, by far the the biggest cut of the money when all is said and done. How eerily predictable-California’s recalcitrant budget deficit, created largely by the downturn or rather avalanche of falling home prices and thus property tax revenues–has recently been discovered to be $16 million… How fortunate…at least in the eyes of Jerry Brown who is vociferously insisting that the bulk of the funds should go to the State of California.
Who Should Get The California Money?
Although at first glance it may seem that, of course, homeowners should get the money, both points of view have strong arguments in their favor.
The pro for the homeowners getting the money is that, simply put, homeowners are for the most part the victims in all this. Yes, many homeowners knew in their hearts they couldn’t make the payments and, yes, some lied to get stated income loans. Each loan could perhaps be justified as the lenders were using all sorts of rationalizations to persuade any reluctant homeowners to purchase. Home values will go up. In a year or two you can refi and lower the payment. These are just two common refrains.
On the macro level, though, homeowners who unfortunately bought or refied their homes during that crazy 5-year window from 2002 to 2007 are almost all underwater no matter how scrupulously they kept their finances. That is not their fault.
At this point, some 345,000 mortgages are delinquent in California with even more homeowners underwater but still valiantly making their payments. Should these people be given some kind of help from the settlement money? Principal reduction, perhaps, or maybe lower their interest rates? Or, should some just have their debts wiped off the books?
PRO: The State of CA
At the moment several foreclosure-prevention bills are bogged down in the state legislature. At the very least argues Kamala Harris, the CA Attorney General who fought so hard to get the settlment, homeowners need a Bill of Rights and banks in California must be more efficiently regulated. So she and her allies are pushing hard to solidify the reforms promised by the mega-banks so this housing debacle does not happen again. On the other side, predictably, are those very mega-banks which do not want to be so regulated along with those who, to be fair, are fearful that the tiny improvements that California housing is making could be stunted at birth.
So, a rare legislative conference committee has been called to reconcile the two sides if possible. Meanwhile, Gov. Jerry Brown is pushing to use some of California’s share of the $25-billion national mortgage settlement to plug holes in the state’s budget. Actually, he has a good case and he’s aiming high; he wants a big share of the money.
A major portion of the budget woes came directly from losses when expected revenues failed to materialize. That revenue is primarily property tax revenue, going down every year since the great recession began, and income tax revenue, which also is failing primarily due to unemployment, especially in the construction and housing sectors. After years of cuts, the budget is already down to the bone. We all know that education and social services have been eviscerated. How can we cut more? The state relies on property tax to serve the needs of all its citizens. Without that money, many of our most needy, primarily children, the disabled, the unemployed and the old, will suffer horribly.
Too, it must be remembered why the attorneys general were going after the banks in the first place. That is a complicated story, but boils down to a failure to pay transfer taxes as required by real estate law. The states lost massive sums of tax revenue because the banks were churning the titles to properties, slicing and dicing them into mortgage-backed securities electronically and not paying the transfer tax and recording required every time a property changes ownership.
Solution: Most Likely Scenario
Both sides have good arguments in this debate over that giant pile of money. Since this is the case, the most likely scenario will be a compromise between the two sides.
Kamala Harris is right: we need a Homeowners Bill of Rights, and the banks, like it or not and they don’t, need good, strong regulations to control them. These two items are bare minimums. As for giving the money to individual homeowners, if it does happen, the amounts will be small because the numbers involved are so large. Better to allocate some money to homeowners’ advocacy and education groups.
The bulk of the money, though, should go directly to the those who most need it–the citizens of this state who lost out on tax revenues due to machinations of the big banks. That is to say, the money should go to pay down the deficit and get California back on track for the first time in over 10 years.