The recent $26 billion mortgage settlement announced by the government has received coverage throughout the news media. Twenty six billion dollars is an eye-popping number. But it is important that discerning readers look beyond the number and the headlines to determine what is really going on here and separate fact from rhetoric and political posturing.
First of all, there is no question that the settlement — an agreement between the Justice Department, the Attorneys General from 49 states, and the five biggest mortgage servicing banks in the country (Bank of America, Wells Fargo, JPMorgan Chase, Citigroup, and Ally Financial) — is a monumental triumph to the process of a complex negotiation. One might call this an especially impressive achievement given that in today's highly charged political atmosphere the states are almost evenly divided between Republicans and the Democrats.
It is important to remember that this settlement was designed to deal only with the loan servicing infractions of the mortgage lending industry. As we all know, the much bigger contributor to the housing bubble and subsequent collapse occurred in the origination and securitization of trillions of dollars of mortgage loans.
Loan originators, coupled with compliant rating agencies and excessively greedy Wall Street investment banks, all conspired to lower their underwriting standards in a quest for more and more volume of highly profitable mortgage securitization transactions which were then sold and distributed throughout the global financial system. To the extent that banks lowered their underwriting standards in what has been called the "race to the bottom", they deserve to be held accountable. It is important to note that the recently announced settlement does not protect the banks from responsibility for these gross abuses of the underwriting and securitization process.
But even in looking at the loan servicing infractions about which volumes have been written in the press, one might ask: Is the right way to hold banks accountable for servicing errors to require them to disgorge funds to borrowers who themselves may have been equally complicit in the process of helping to create mortgage fraud or of not living up to the obligation to which they committed themselves? Is it fair and just to require a bank to relieve part of a borrower's obligation when that borrower may well have grossly overstated his income, assets, or employment background in order to obtain a loan for which he did not really qualify? What entitles us to assume that millions of borrowers signed a promissory note without really understanding what they were doing?
Furthermore, while there is no question that banks, overwhelmed with the sudden volume of delinquencies and foreclosures, erred in trying to short-cut proper procedure in processing foreclosures, this does not mean that banks were foreclosing on innocent borrowers who were current with their mortgage payments. It is well established that virtually all mortgagors who ultimately lost their homes were far behind in their payments. Indeed, the one state attorney general (Oklahoma's) who opted out of the mortgage settlement did so because he felt that payments under the agreement would unfairly reward borrowers who were delinquent on their mortgages and encourage other borrowers to become delinquent, thereby contributing to the problem of moral hazard.
Of course, in instances where borrowers were injured by short cuts or errors in the loan servicing process, they are entitled to be compensated with funds from the $26 billion settlement. But in order to fairly administer the distribution of these funds, it is crucially important that all the parties involved work together in establishing procedures whereby loan application information is reviewed for accuracy and loan payment history is examined. A borrower who blatantly falsified information on his loan application, which was known to be a common occurrence, should not receive a windfall settlement. Similarly, a borrower with a long history of delinquency should not be rewarded because of a technical, non-substantive error in the foreclosure process.
One can well understand why the President, as he enters a difficult election year, would want to make a highly publicized announcement which makes a "whipping boy" out of the banking system. It would also be interesting to know how many of the 49 state attorneys general are seeking to run for governor or other high office in their respective states.
But setting politics aside, let us make sure that these funds are administered in a way which helps only those borrowers who were actually hurt through no fault of their own. Only in this way can fairness and justice be achieved.
Alexander R. M. Boyle is the retired vice chairman of Chevy Chase Bank. He has worked in mortgage lending and consumer banking for 30 years.