When the attorneys general in 49 states announced a $25 billion mortgage settlement with the nation's five largest banks, the deal infuriated some observers and offered a glimmer of hope to others.
Detractors called the plan a slap on the wrist. Critics charge that the $25 billion banks are set to pay homeowners, states and the federal government is a small price to pay for alleged abuses in lending and wrongfully foreclosing on certain homeowners amid the so-called "robo-signing" scandal.
But supporters of the settlement say it will help curb lending abuses and ensure better protections for homeowners who might face foreclosure in the future.
What does the settlement mean for the broader mortgage market? And what will it do to lending in the current climate?
Housing settlement plays to mixed reviews
Housing experts say the settlement presents, at best, a mixed bag for both lending opportunities and consumers' homeownership prospects.
"There definitely will be some impact on strategic defaults, but not a large impact by any means," says Jon Maddux, founder of YouWalkAway.com, a company that advises homeowners on how to best strategically default on their mortgages.
"They're offering $20,000 in principal reductions, but what about people who are $60,000, $80,000 or even $150,000 underwater?" Maddux asks. "They're still stuck and they still can't sell their homes. The majority of people are so underwater that $20,000 isn't going to fix that."
Indeed, following the settlement, YouWalkAway.com surveyed its clients and found that 61percent of them said they would have still chosen to walk away even if they did get the $20,000 now being offered to certain customers of Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial (formerly GMAC).
Under the deal, $10 billion will go to write down the principal balances for those who are delinquent on their mortgages and owe more than their homes are worth. (Four banks in the settlement agreement say they'll slash principal balances by $20,000, but Bank of America will reportedly reduce some balances by an average of $100,000 or more.) Additionally, some $3 billion is slated to help refinance homeowners who are current on their mortgages but underwater on their loans.
The agreement also creates a $1.5 billion "borrower payment fund" that will send $2,000 checks to 750,000 borrowers who were foreclosed upon between Jan. 1, 2008, and Dec. 31, 2011.
Skeptics doubt impact on housing market
Aaron Weber, real estate agent and housing specialist in Madison, Wis., says he's skeptical the settlement will move the needle on the housing market.
"Like any of the other government programs that are supposed to help people who are behind on their mortgages or underwater, there's so much paperwork that to even get through the application process is a burden or nearly impossible," he says.
"There's no streamlined approach to try to help these people," Weber notes, adding that "a process that should only take a couple of weeks can take six to eight months."
Robert Weinberg, branch manager at Benchmark Mortgage in Watertown, Conn., agrees. He says the average homeowner is frustrated because they feel like they're getting no help from the government -- and no help from lenders either.
Although he's skeptical about the settlement being a broad help to the housing market, Weinberg says that for those who do qualify, "that could be the difference between a strategic default and the person saying 'I'm going to tough this out because now they've given me the incentive to stay in this home.'"
"Homeowners feel they're the only one taking it on the chin. But the minute they see that someone's trying to help them, and that other people have skin in the game too, or that they can catch a break, that's all the average American is looking for," Weinberg says.
'Big five' promise to refinance loans
The nation's "big five" banks are promising to refinance loans under the robo-signing settlement, even for people with no equity in their homes. Weinberg says refinancing those loans is necessary, and not particularly risky.
"The loans are still on the books, so refinancing underwater homeowners simply makes the mortgages more affordable. Ultimately, they will be better-performing loans, which actually makes them less risky for banks, investors and everyone involved," he says.
One thing the settlement will do, some observers suggest, is open the door to more potential foreclosures in 2012. That's because the robo-signing agreement removes the risk of banks facing most federal and state lawsuits over home evictions.
For this and other reasons, "we expect foreclosures to peak in 2012 or early 2013," says Maddux.
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Lynnette Khalfani-Cox, The Money Coach®, is a personal finance expert, television and radio personality, and the author of numerous books, including the New York Times bestseller "Zero Debt: The Ultimate Guide to Financial Freedom." A former Wall Street Journal reporter for CNBC, Lynnette has appeared on such national TV programs as The Oprah Winfrey Show, Dr. Phil, The Today Show and Good Morning America. She can frequently be seen as a guest commentator on CNN, MSNBC, ABC and FOX Business Network. Follow Lynnette on Twitter @themoneycoach or visit her free financial advice blog at AskTheMoneyCoach.com.