The $26 billion mortgage deal agreed to by state and federal authorities late Wednesday has come under attack from critics for sending mixed signals to homeowners and not going far enough to stabilize the weak housing market.
Nearly 2 million homeowners are expected to benefit from the settlement. According to the Neighborhood Assistance Corp. of America, the deal covers just 10 percent of all the mortgages in the country. The settlement will give payments to those who have already foreclosed on their homes and to homeowners who are actively trying to refinance their mortgage rates or have their mortgage debts reduced. The five biggest banks in the mortgage market -- Ally Financial, Bank of America (BAC), Wells Fargo (WFC), JP Morgan Chase (JPM) and Citigroup (C) -- will contribute amounts that are representative of their share of the mortgage market.
Bank of America will be paying the most, providing $11.8 billion to homeowners. The government has given the banks up to three years to make payments to homeowners. Mortgage giants Freddie Mac and Fannie Mae were not included in the settlement. [For more details about the settlement please read: $26B Mortgage Settlement: Good for Banks, Not So Good for Homeowners].
Banking analyst Dick Bove is one of the deal's critics. In an interview with The Daily Ticker's Aaron Task, he says the agreement is "a mortgage deal from hell" and a "socialist option" that will help only a tiny fraction of the nation's homeowners who are underwater on their mortgages. He argues that the agreement, which took months to negotiate, could give homeowners who are current on their mortgages a perverse incentive to stop making monthly payments.
"I am actually getting phone calls from people asking me, 'How do I go about stopping my home payment so I can get the benefit of this program?'" Bove says. "If you stop making payments on your mortgage you will qualify for this benefit ... . The theory that it will assist the economy in some fashion is almost laughable."
Forty-nine state attorneys general signed off on the mortgage deal. The biggest mortgage lenders had faced a mountain of lawsuits from state AGs over accusations that they had illegally initiated foreclosures. Bove says he believes the deal won't put these lawsuits to rest.
Litigation risk off the table? "Not at all," he says. "This didn't clear up anything. The government is emboldened to go further. This issue will be with us for a while."
- Bank of America