Mortgage Settlement Is Beating Goals, Proving Doubters Wrong

Late last month, Joseph A. Smith, Jr., the independent monitor of the National Mortgage Settlement, issued his third progress report. The results show that in its first 10 months, the settlement outperformed targets, proving the critics wrong.

In the three main categories of homeowner benefits—first lien reduction, second lien reduction, and short sales—the benefits far exceeded our expectations. Overall we estimated homeowner benefits of $34 billion within 36 months. We have realized $45.8 billion in the first 10 months, helping 554,389 homeowners.

Our first priority was principal reduction. The agreement required at least $5.1 billion in first-lien principal reduction. In 10 months, more than double that—$10.9 billion—has been achieved. The agreement requires $17 billion in total credits for homeowner benefits. Principal reduction alone could approach that amount.

Some voiced opposition to principal reduction because they thought that once it began in a significant way, many who could pay their mortgages would default, endangering the whole market. That has simply not happened. Rather, as a result of principal reduction, more people are staying in their homes and are making sustainable payments.

Our hope and plan was that the settlement would show principal reduction works and that it would act as a catalyst for the use of writedowns in other loan modifications. That is now occurring. For example, about three-quarters of eligible underwater homeowners entering the Home Affordable Modification Program in 2012 received some form of principal reduction. 

There has also been a surge in the numbers of short sales—$19 billion worth. This is a good thing. Short sales are initiated by homeowners, not the banks, and are a better alternative to foreclosure. They allow homeowners the freedom to move in situations that may involve taking a job elsewhere or changing family needs. My office previously received many complaints from borrowers seeking short sales who could not get them. Those complaints are now minimal.

With short sales, homeowners do not owe the deficiency and are given a fresh start without debt collectors hounding them for years to come. Neighborhoods are spared the empty homes and home value losses associated with foreclosures. The housing market is better off. Investors lose less money than they would in a foreclosure. It is likely that the servicers won't need credit from short sales to fulfill their $17 billion consumer relief requirements.

Second lien reductions are also far beyond expectations at $11.6 billion. Second lien reductions help homeowners stay in their homes and ensure an element of fairness for the holders of the first lien. It is likely that there will be enough first and second lien reductions to satisfy the homeowner benefits requirements under the settlement's consumer relief credit structure.

The settlement is accomplishing the objectives that we had set in shaping this joint state-federal civil law enforcement effort. It is providing substantial relief to borrowers that they would not have received otherwise. It is keeping people in their homes, it's helping our communities, and it's assisting in the housing market recovery.

Iowa Attorney General Tom Miller was the lead state attorney general in the joint state-federal $25 billion national mortgage settlement.