The depressed U.S. housing market remains the key headwind to economic recovery, with an estimated 22% of homeowners owing more than their house is worth and with millions facing foreclosure. After 18 months of tortured negotiations, the five biggest mortgage servicers, 49 state attorneys general and the Obama Administration recently reached a settlement that may remove one obstacle to a housing turnaround: banks' fears of government lawsuits for reckless lending practices. The deal, announced Feb. 9, releases the country's largest mortgage lenders from state or federal liability for badly handled foreclosures and for pushing mortgages on borrowers who couldn't afford to pay them. In return, the banks agreed to pay nominal penalties to victims of mortgage abuse and to fund foreclosure mitigation. Both sides agreed to new, tougher mortgage-servicing standards. With an estimated $700 billion in negative equity in American homes, the deal's $25 billion price tag is unlikely to fix the market. But proponents say it's about time that homeowners--rather than just banks--got a bailout.
Why knowing your customer can't be outsourced
The big bank settlement started as a narrow investigation of foreclosure abuses by five of the biggest mortgage servicers. In states that require court oversight of foreclosure, the big banks hadn't checked every one of hundreds of thousands of defaults to ensure that eviction was unavoidable. Instead, they hired firms that falsely signed affidavits declaring it was. Few people were wrongly evicted, but such robo-signing was potentially criminal fraud, opening the way for serious scrutiny of all home-loan practices.