Forbearance, Forgiveness, Immunity and Complexity cont.

While it's only tangentially related to the bank settlement deal I previously discussed, I think former White House economics adviser Jared Bernstein unpacks some interesting details on the complexity of the housing market mess that bear highlighting. Bernstein is mostly talking about the pros and cons of mortgage forbearance versus forgiveness, with a specific point that the Federal Housing Finance Agency conservator of Freddie Mac and Fannie Mae, who in turn are 80% owned by the Fed gov't) could quickly reduce the principal on millions of home loans they own or insure, without going through Congress." The FHFA can do this either through a forbearance plan with underwater homeowners (which would restructure the terms of their loans) or forgiveness (which would actually reduce the principle of the loan itself.

"The path ahead," Bernstein explains "toward forgiveness, not forbearance—should be clear." The reasons why is the main thrust of what he's writing about here. Even if you just skim it (I certainly glazed over a few paragraphs myself) you defiantly start to see the complexities of the housing market problem.

Forbearance, Forgiveness, Immunity and Complexity

I wanted to share a few housing policy related thoughts, and a few pieces that have been kicking around my head and the blogosphere. First, the AP and New York Times have published similar reports a few days apart indicating some movement toward a final bank settlement deal. The negotiations are between the Housing and Urban Development Department, State Attorney Generals and five major banks: Bank of America, JP Morgan, Chase Wells Fargo, and Ally Financial (formerly GMAC). According to both articles, the topline figures include $25 Billion from these banks for underwater homeowners, "with up to $17 billion of that used to reduce principal for homeowners facing foreclosure," according to the Times; which also reports that:

Another portion would be set aside for homeowners who have been the victim of improper foreclosure practices, with about 750,000 families receiving about $1,800 each. But bank officials said Monday that the total amount of principal reduction and reimbursement would depend on how many states eventually sign on.

A few reactions to the settlement leak, and these reports, have been making rounds (which I suspect is partly why these types of leaks occur in the first place). First there is George Zornick of The Nation. The meat of the piece is a handful quotes from representatives of progressive constituencies, like House Rep Sherrod Brown (D-OH), who laments that "When laws are broken there need to be full investigations. Wall Street should not get another bailout.” Zornick himself claims that the deal is "terrible" and the $25B figure "inadequate". Felix Salmon of Reuters has a more measured take, explaining that the $25 Billion figure is "reasonably large," but adds that "most of that is principal reductions which would make a lot of sense for the banks even if there were no settlement at all."

I think it's important to keep sight of the fact that the opinions on the settlement size vary with a person's political inclinations, as well as a person's understanding what's both good policy and legitimately feasible. (Although I would like to be clear that I am not going to personally comment on the the adequacy of $25B over $50B or $5B. I just don't have a good understanding of the scale.)

Another wrinkle here is the issue of the amount of legal jeopardy banks will be vulnerable to at the end of the deal. I think it is clear that banks would prefer total immunity from civil/criminal suits, and legislators like Rep. Brown would prefer the fullest amount of investigation legally feasible. But as Salmon points out:

"If you’re a bank in settlement talks and you want to do across-the-board principal reductions while removing yourself from legal jeopardy, of course you try to connect the former to the latter. After all, principal reductions plus immunity from prosecution looks much more attractive than principal reductions on their own. And the government can’t announce a big settlement figure if the banks have already reduced the principal on a lot of mortgages anyway." (emphasis mine - JMG)

Moreover, the negotiation of the immunity issue seems to extend beyond just banks and public representatives. According to the Times, there is a bit of internal politics within the State Attorney Generals who are (rightly) attempting to shape a final deal that most benefits their constituents. Specifically,

In a bid to win support from California officials, [Housing Secretary Shaun] Donovan proposed earmarking $8 billion in aid for beleaguered California homeowners, but that left other state attorneys general incensed, according to an official familiar with the negotiations.

The big takeaway I would like everyone to have from all of this, is that even seemingly clear-cut issues like prosecuting larger banks for the fraud associated with their mortgage/foreclosure practices, can be much more complex than they initally appear. Different stakeholders have different incentives and that the process of maximizing various interest group demands is rarely a black-and-white, let alone glamorous process.