Is there no limit to what federal and state governments will do to hurt the housing industry? After today’s foreclosure settlement with banks, real estate professionals ought to be very, very worried.
“There is no sanctity of contracts in the United States,” Bove said. “Only fools meet their financial commitments. The non-payers are the truly enlightened.” So said Dick Bove, banking analyst at Rochedale Securities in an interview on CNBC, referring to the foreclosure settlement reached by some of America’s big banks and various state Attorney’s General. Perhaps a simpler assessment was his observation that the settlement was “a mortgage deal from hell.”
We couldn’t agree more.
According to the deal, the AG’s didn’t even allege the banks had foreclosed on anybody who was still paying their mortgages. In fact, there are so few “improperly foreclosed upon” cases that one wonders how this case got so far. Admitted – by all parties – that robo-signing documents in an effort to speed the backlog of foreclosures through the court system was fraud, we are still left to wonder how it rated a $25 billion dollar settlement, since it was a nearly victimless crime.
Perhaps that’s because the deal itself actually has very little to do with the robo-signing brouhaha. If you look at the numbers, both dollars and people helped, the real scandal is the shakedown of the banking industry. (We expect everyone who is perpetually angry at banks for every ill in society will stop reading now; braver souls may read further.)
Of the $26 billion (some analysts expect the final tally to be closer to $40 billion), nearly $20 billion isn’t even for the supposed victims. It’s money for forced mortgage refinancings and principal write-downs for underwater borrowers. Money that, if we take the last few years of HAMP efforts as an example, will likely do nothing for those borrowers anyway (According to a Congressional Oversight Panel, 21% of all HAMP loan modifications re-defaulted within the first year.) In fact, this deal would likely only help 500,000-1 million homeowners, less than 1% of the total number of homeowners in the country. But that’s really not the worst part of the deal.
The worst part of the deal is evident to anyone who looks for the unintended consequences of this settlement. And those will be many (and remarkably obvious), such as:
- Forcing banks to write down the value of assets on their books destabilizes their balance sheets, which further destabilizes the banking industry, which supposedly required stabilization with public dollars at the start of the entire recession. Even those banks who have set aside funds in anticipation of the settlement will certainly not be better off for losing that money. And taxpayers are left at greater risk, once again, that a bailout will be required with public funds.
- Devaluing assets harms bank shareholders, which means pension funds, retirement funds and everyday stockholders who will earn less on their investments, destabilizing the personal balance sheets of millions of ordinary Americans. Any transfer of wealth from one group to another necessarily involves damage to someone. Let’s not fool ourselves that the recipients of the write-downs will suddenly have more money to spend in the economy, either. So it’s wasted money.
- It reinforces the message of the state and federal government to banks: We’re not going to let you make money in real estate any time soon. The Fed will keep rates so low you cant make money funding mortgages. The constant threat of lawsuits will encourage banks to exit the industry. It’s no coincidence that Chase and Bank of America are looking to follow GMAC and others who have already exited the mortgage business. All of which will keep credit tight, lending low and stall the housing market for years to come.
- It sends a message to consumers that contracts are meaningless, paying your bills old fashioned, and reckless borrowing will never be punished. This can never be a good sign for an industry built around credit and contracts, like the housing industry.
- It will reposition cash buyers in the housing industry as more desirable, only serving to force prices down further. Cash buyers are already giving sellers haircuts: Owners who fear the risk of buyers whose funding will fall through will take a lower price in exchange for a quick closing with cash. This means lower returns for homeowners, lower commissions to brokers, and lower neighborhood values.
- It will push investors away from the housing market. Real estate investment legend Sam Zell of Equity Group Investments recently told CNBC that he wouldn’t be making any bets in housing for a long time, essentially because the government keeps interfering with the banking system’s normal process of clearing the housing industry and restoring everyone’s balance sheets, meaning: foreclosures must happen, and the government keeps trying to put them off indefinitely.
Even if you dismiss all of the above, the fundamental question that remains is: How does this settlement warrant $26-40 billion dollars in fines, most of which don’t go to the people supposedly harmed? Fully broken down, it looks like $5 billion to states and federal authorities, $17 billion for write-downs for underwater borrowers, $3 billion for refinancing and $1 billion to FHA. It makes no sense.
Which begs two questions: First, why would anyone want to provide financial services in an environment where nothing makes sense, contract sanctity can be eviscerated by Attorneys General at a whim, consumers are told that credit worthiness is irrelevant, and profits will be marginal, under the constant threat of lawsuits resulting in non-sensical fines?
And second: Just what do real estate brokers plan to do when credit tightens even further?